By Jeff Gilbert
COVID-19 may be primarily a health crisis, but it’s already had a significant impact on our economy. With thousands of businesses temporarily shut down and millions of people staying at home, we could be on the brink of a recession. And as some economists have predicted, the longer our economy is on pause, the harder this potential recession may hit. (1)
Regardless of what the future holds, here are 5 ways to financially prepare for the next economic downturn.
1. Don’t Panic
Right off the bat, stop and take a deep breath. Accept that there are going to be things that happen during a recession that are out of your control. Your portfolio will dip. Your work hours may be cut or you could lose your job altogether. The media will go on and on about the disastrous state of our economy. There will be moments of fear and doubt.
But instead of giving in to these feelings, focus on the facts. We’ve had 12 recessions since World War II—and we’ve recovered from all of them in an average of 11 months. (2) This too shall pass.
2. Build Up Your Cash Reserves
Nearly 70% of Americans have less than $1,000 in savings. (3) If you’ve kept your cash reserves pretty lean up until this point, now is the time to build them up. Make sure you have at least six months of expenses in an emergency fund. If you’re nearing retirement, you may want to bump it up to a year or two. Keep this money in a liquid savings or money market account where you have easy access to it when you need it.
One quick way to build up cash reserves is to cut out any unnecessary spending. This could be subscription services, shopping, vacations, and so on. You can also sell any items you no longer want or need. Remember, this isn’t forever. You can increase your spending once you’ve built up your savings. This is all about recession-proofing your finances so you’re ready for whatever comes next.
3. Pay Off Debt
Debt is an issue for most people even when the economy is at its best. But this issue magnifies when your investments take a hit and there’s a risk of losing your job. Make a plan now to pay off as much debt as you can. This could be anything like credit card debt, medical debt, car loans, and student loans. The more you pay off now, the fewer expenses you’ll have in the future (and the better off you’ll be if things take a turn for the worse).
4. Don’t Stop Investing
Our gut reaction is to sell when the market is shaky and buy when it’s strong. But this is the exact opposite of what we should do. In reality, a recession is the perfect time to buy investments at a steep discount.
The average bear market lasts 1.3 years with an average 36% dip. But bull markets usually last 6.6 years with an average 339% increase. (4) This means that if you buy when the stock market is at its worst, you’ll reap the benefits of huge gains when it rebounds (which it historically always has).
5. Diversify Your Skill Set
Losing your job is everyone’s biggest fear during a recession. Minimize your chances of a layoff by keeping your skill set sharp. Some common ways to do this include:
- Maintaining certifications
- Taking online classes
- Earning an advanced degree
- Taking on new responsibilities at work
Even if your company ends up downsizing and you’re on the chopping block, improving your skill set will make you more marketable to future employers, which will make it easier to find a new job.
How We Help
Recessions are inevitable. There’s nothing we can do to stop them. But there are concrete ways you can prepare for the next one. In addition to the suggestions above, one way to recession-proof your finances is to get unbiased advice and guidance from a financial professional.
At Balboa Wealth Partners, we’re dedicated to guiding you toward financial independence. Whether you need help managing your assets or creating a financial plan to help get you through the next recession, we’re here to help. Give me a call at 949-445-1465 or email me at email@example.com to get started.
Jeff Gilbert is the founder and CEO of Balboa Wealth Partners, a holistic financial management firm dedicated to providing clients guidance today for tomorrow’s success. With nearly three decades of industry experience, he has worked as both an advisor and executive-level manager, partnering with and serving a diverse range of clients. Specializing in serving high- and ultra-high-net-worth families, Jeff aims to help clients achieve their short-term and long-term goals, worry less about their finances, and focus more on their life’s passions. Based in Orange County, Jeff works with clients throughout Southern California as well as Arizona, Oregon, and Washington. To learn more, connect with Jeff on LinkedIn or email firstname.lastname@example.org.
Advisory services provided by Balboa Wealth Partners, Inc., an Investment Advisor registered with the SEC. Advisory services are only offered to clients or prospective clients where Balboa Wealth Partners and its Investment Advisor Representatives are properly licensed or exempt from registration.
Securities offered through Chalice Capital Partners, LLC, member FINRA, SIPC.
Balboa offers advisory services independent of Chalice. Neither firm is affiliated.