How to recession-proof your finances; why strategist says don’t panic

If you’re keeping an eye on financial headlinesyou’re likely seeing the same dirty word pop up again and again: recession.

Analysts at government-backed mortgage firm Fannie Mae recently forecasted the economy to fall into a recession in the latter half of next year. Economists at Goldman Sachs say there’s a 35% chance of a recession in the next two years.

Regular folks are even more concerned, with 81% of Americans saying they think the economy is headed for recession in 2022 in a recent CNBC + Acorns Invest in You survey, conducted by Momentive.

It makes sense that some analysts and investors are feeling a bit worried. A recession is an economic slowdown generally defined by two consecutive quarters of negative growth in gross domestic product, which is the sum of the value of all goods and services produced. And these days, in order to fight high inflationthe Federal Reserve is hiking interest rates and installing monetary policies meant to, well, slow the economy.

If an economic downturn happens, things generally aren’t great for folks on the ground. “Usually, when you think of recessions, four things happen,” says Bob Bacarella, founder of Monetta Financial Services. “Normally you have a high unemployment rate, wages that are declining, lowering housing prices, and declines in the stock market. We’re not really there at this point.”

Video by Jason Armesto

Even so, it’s wise to make sure you’re prepared. There are some smart steps you can take that can benefit your finances now, and help you stay on track through tough economic times.

While those generally involve financial moves, the most important part of your preparation may be mental, says Chris Maxey, chief market strategist for Wealthspire Advisors.

“Don’t panic. Don’t be overly concerned about the notion of a recession,” he says. “We’re attuned to it being a scary outcome, but it’s all a part of the natural ebb and flow of the economy.”

Here’s how experts recommend “recession-proofing” your finances.

Pay down high-interest rate debt

For many Americans, the word recession conjures up memories of the Global Financial Crisis that began in 2007. One of the many issues that triggered that crisis, points out Maxey, was debt. “There was so much leverage. Not only from corporations, but also at the consumer level where people were going into debt to buy two or three homes.”

When the economy sinks, if you’re significantly indebted, you could struggle, Maxey points out. “If you think a recession is on the horizon, shore up those types of expenses that aren’t additive to your personal balance sheet,” he says. “If you have high interest rate debtlike credit card debtthat’s something you’re going to want to pay down now.”

This is especially important, he adds, because the Fed has signaled intentions to hike interest rates in the coming months. “Those rates are going to be ratcheting higher, and the cost of credit card debt is going to be very expensive.”

Build up your emergency savings

Even in the best of economic times, building an emergency fund is a good idea, financial experts say. But given rising costs for everyday expenses such as food and gasoline, you’d be especially wise to bolster your cash reserves if you believe an economic slowdown is on the horizon, says Karen Heider, senior wealth advisor at Concenture Wealth Management.

“You want to have emergency savings in the bank and ready to go,” she says. “Generally you want three to six months’ worth of expenses, but it’s not a bad idea to have a little more than that given that we expect things to cost more.”

Three to six months’ worth of expenses can feel like a daunting number, which is why many financial experts recommend starting by aiming for a smaller, more achievable savings goal. Assuming you receive 26 paychecks per year, you’d have to save $38 per check to have $1,000 stashed away one year from now. That would put you ahead of some 56% of Americans who say they couldn’t cover a $1,000 expense without dipping into debt, according to a recent survey from Bankrate.

Video by Stephen Parkhurst

Shore up your income

At the moment, it may not feel as though a job loss is something that you need to prepare for, says Maxey. “Jobs are fairly plentiful in every sector. If someone lost a job today, you wouldn’t have a hard time finding a new one. That’s true of lower- and higher-wage workers.”

Still, an uptick in unemployment is a classic hallmark of recessions, and it pays to make sure you’ll have money continuing to come in when the economy slows, says Heider. “When recessions come, companies may have to perform layoffs to shore up their balance sheets,” she says. “It’s essential to make sure that you’re as indispensable as possible.”

Video by Mariam Abdallah

What that means, she says, will vary by industry, but generally it can only help your chances if you strive to be your company’s “model employee.” But even doing that may not guarantee your job security. “You’re going to want to have your resume polished and ready to go as well,” she says.

picking up to side hustle may help provide you with a bit of a safety net, Heider adds. “If you have a special talent or want to get into a side hustle, now is a great time to do that,” she says. “If you lose that job, have income streams coming in from multiple sources is going to be a huge benefit to you.”

Diversify your investments

No one knows exactly what shape the next recession will take. But for those trying to get an idea of ​​how their finances might be affected, it pays to look back at historical trends, says Brent Ford, founder of Benefit Wealth Partners. “If you look at four of the five last recessions, the average drawdown in the stock market was right around 30%,” he says. “I think that’s a pretty good expectation of what this recession is going to be if we do in fact hit one.”

And after each recession so far, the economy has bounced back and the market has reached new highs, points out Heider. “Market might get kind of crazy. Don’t panic and make an emotional decision that can hurt you,” she says. “Recessions are common. They happen, we get through them, we make it to the other side, and we keep chugging along.”

Video by Stephen Parkhurst

Big losses in your portfolio can tempt many investors to sell in order to avoid further losses, but that’s exactly the kind of behavior that financial pros warn against. “When things drop, for the long-term investor, that’s actually a buying opportunity,” says Heider. “You should take advantage when stock prices are cheaper to buy because you can hold them long-term coming out of the recession.”

The best way to keep yourself from panicking and selling when things slide: Building a portfolio with a wide variety of investments that behave differently when markets go down. “The best way to defend yourself is to switch to a diversified portfolio,” says Bacarella. “The whole market may be down 8% in a day, but an individual stock you own could be cut in half. Diversification gives you a cushion during a downdraft.”

The views expressed are generalized and may not be appropriate for all investors. The information contained in this article should not be constructed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses.

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