Have you read the financial news lately? Even if you've just scanned the headlines this year, you've probably noticed a lot of people discussing the dreaded R-word: Recession. Inflation and interest rates are both high and – if left unchecked – those are a dangerous combination for the economy.
No one can predict the future, but one thing we can count on: another recession is coming. And the one after that. And the one after that one, too.
What is a recession?
A recession is a significant decline in economic activity across the economy, usually measured in terms of Gross Domestic Product (called GDP, or the total value of goods and services produced within a country). In everyday language, though, a recession is a simply period of time when the economy isn't doing well. Businesses make less money, people might lose their jobs, and it's harder for everyone to afford things they need. It's like a tough financial time for a whole bunch of people, companies, the country, or the whole world – all at once.
How common are recessions?
As painful and devastating as national or global recessions are to live through, they are actually fairly common. The U.S. has been through 12 recessions in the last 78 years, or about one every 6.5 years. So are we on the verge of the next recession?
While none of us know when the next one will happen, it's been about 14 years since the last recession ended. The odds are not in our favor. Regardless of when it happens, though, we can be confident that another recession will happen. Live long enough and you are likely to see many more recessions in your lifetime.
What can you do now to prepare?
So what can you do to prepare for the next recession? Here are 5 ways that you can build financial stability and security before a recession starts:
Build an Emergency Fund: Keeping enough money to cover 3-6 months' worth of essential expenses in an interest-bearing, FDIC insured cash account can be the difference between navigating a downturn in relative comfort or total panic. Knowing that your expenses are covered for at least 3-6 months should you lose your job of experience serious financial setbacks can help you sleep a lot better at night. A healthy cash savings can also prevent selling investments to pay your bills at the worst possible time.
Reduce Debt: Focus on paying off high-interest debts as much as possible. While it might feel like a big deal to carry a credit card balance now, it will quickly become unmanageable if your income slows or stops. Focus first on credit card debt and personal loans (rather than high-balance loans like mortgages and auto loans), as these high-interest debts can become a significant burden during tough times.
Understand your spending: We all pay for things or experiences that are nice, but not necessary – and that's totally fine. Understanding the difference between "nice to have" and "need to have" expenses, though, becomes critical during a recession. Which expenses could you cut if necessary? Which could you reduce? Knowing the minimum income you need to cover basic spending will make a lot of decisions easier during a recession – and save you a lot of headache. (Want a quick way to manage essential & discretionary spending while saving the right amount? Click here to learn more.)
Diversify Income Streams: Chances are you know someone who had to learn new skills or change industries entirely during an economic downturn to find a job. (Maybe that even happened to you.) How helpful would it have been to already have extra skills or an entirely separate revenue stream before it became necessary? Relying solely on one source of can be a liability during a recession. Consider exploring additional income options that you could learn or implement sooner than later, such as freelancing, part-time work, or starting a small side business.
Invest Wisely: How confident are you that your investment mix (your allocation, in industry jargon) matches your goals, time horizon, and risk tolerance? Now is the time to review your investments to make sure you are appropriately diversified across and among a mix of assets like stocks, bonds, and cash. Holding the right balance in your investment accounts can help smooth out those rough patches and reduce losses during market downturns. (Want to know if you are taking the right amount of risk with your investments? Click here to take an interactive risk tolerance quiz.)
Remember that the key to preparing for a recession is to make yourself more resilient and flexible well in advance. A strong cash savings, lower debt payments, a clear understanding of what you do (and do not) need to spend, investments that match your risk tolerance & time horizon, and options for alternate sources of income are great ways to build financial stability, security, and peace of mind. They can help you weather the bad times and open up new possibilities during the good times.
By implementing these strategies, you'll be better equipped to weather economic uncertainties and come out stronger on the other side.
When the next recession comes (and it will), remind yourself that it is just something that happens every so often. Not fun, not comfortable, but also not uncommon. Preparing in advance is part of the process of building and maintaining wealth.
Curious about your current financial well-being? Looking for potential weak spots that could use your attention? Click here to get started on your financial scorecard and receive a free personal assessment. These quick 2-3 minute assessments are great for spotting things that are going well, areas that need attention, and the most important conversations you should be having around money. Want to learn more? Click here.
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial futures. As both advisor and accountability partner, we help identify current strengths and weaknesses, clarify and refine your long-term goals, and prioritize understandable, manageable, and repeatable actions to bring long-term financial well-being. Reach out today to take the first step.