4 Financial Tips to Prepare You for the Next Recession

It’s easy to feel spooked or pessimistic about the financial future with the endless material online. While there isn't sufficient evidence to suggest a recession is anywhere near, that doesn’t mean you can’t be prepared. Financial preparedness should be built and maintained regardless of the current health of the economy. If you’re financially healthy, it doesn’t matter what life (or the economy) might throw your way as you’ll be ready for it. With this in mind, here are four ways to improve financial health and help you prepare for the next recession.

Stay the Course

Far too often, when a recession hits, people lose their jobs, take pay cuts, and their investments tank. Then, they freak out and have a negative emotional reaction. This reaction almost always ends in poor financial decisions. They start liquidating their investments, they sell other assets at a loss, they rack up a bunch of credit card debt and it all quickly spirals out of control.

Being prepared for a recession means being prepared to make smart decisions when decisions need to be made. You need to have set goals for yourself and laid out a plan to get to where you want to go financially. If that means maxing out your 401(k), for example, you don’t want to stop maxing out your 401(k) just because you see the account value drop in a recession. Keep your long-term and short-term goals in focus, and don’t let your emotions derail your course.

Take Advantage of Market Volatility

When the stock market is crashing, you should be buying, not selling. When you see your investment accounts losing value, this means an opportunity exists to buy more shares at a lower price, not sell your holdings for a loss. Rule 101 of investing is “buy low, sell high.” This is how you can be successful in the long-term.

Another important aspect of long-term success through market volatility is remaining invested through it all. Those that stay invested through market downturns do better than those that did not.

The average investor buys when the market is hot. Everyone’s making money hand over fist and all the media outlets praise the results. This is dangerous, however, as you’re already late to the game. You bought high, and when the market crashes, you want to sell. The only result of this strategy is your hard-earned money lost. Timing the market consistently over time is impossible. The best action long-term is to stay the course. Contribute to your investment accounts on a monthly basis regardless of what the market is doing and take advantage of the downturns when they arise.

Build an Emergency Fund

If a recession hits and you lose your job, you don’t want it to derail everything you’ve been working for. It could force you into racking up credit card debt or pulling money from your retirement accounts prematurely. You can avoid this by having an emergency fund in place. Maintaining an emergency fund is one of the hallmarks of long-term financial stability.

Each person’s situation is unique so there’s no set amount that you should have in an emergency fund. In general, at least three to six months of fixed and variable living expenses is recommended. Your fixed expenses would be your mortgage, utilities, student loan payments, etc. Variable expenses could be groceries, dining out, travel – any expense that might vary from one month to the next.

You should look at your budget and consider all the factors that might impact your ability to meet your financial obligations (savings goals included) should an emergency arise. This will help you determine what amount you should keep in your emergency fund. You’ll want this set aside by the time a recession arises so you’re well prepared.

Pay off Bad Debt

Many people think any form of debt is bad, but that’s not the case. There is such a thing as good debt and it’s important to know the difference. Good debt helps you better your financial situation. A mortgage to buy a house, student loans (within reason) to improve your job prospects and earning potential, or a personal loan to consolidate and pay off credit card debt quicker could all be considered forms of good debt.

It’s the bad debt you want to avoid. The most common form of bad debt is credit cards. These come with high interest rates and can easily be mismanaged. Bad debt will also follow you around like the plague, always nagging at you, making it difficult to borrow money and always putting a crunch on your cash flow. If a recession hits, you don’t want the potential negative impacts of that recession putting you in a place where you’re struggling to pay off credit card debt, or worse, having to rack up even more.

Get your credit cards paid off and balance-free before the next recession rolls around and learn how to properly manage credit card spending. Addressing the behavior or habits that resulted in holding a balance on credit cards in the first place is the key to overcoming credit card debt into the future.

The Bottom Line

These financial steps can help prepare you for a recession or financial disaster, but they are also applicable at all times. Building and maintaining financial health should be a lifelong pursuit regardless of what the economy is doing. When you’re financially healthy, you’re financially prepared for anything life can throw your way.

Recent articles by Chad Rixse: Don't Let Emotions Derail Investment Decisions