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If you weren’t adulting back in 2007-2009, you’ve yet to navigate an economic slump. It’s been that long since the last recession hit.
Shoring up your financial plan and career is important no matter which way the economic winds are blowing. That said, 2020 is shaping up as an especially smart time to make sure you’re recession-ready. Nearly three of four economists in a recent national survey said they expect the next one to start before the end of 2021.
Whenever the next recession lands, it will merely be your first. Despite the long respite since the last one, downturns are a normal part of the economic cycle.
There have been 12 recessions since World War II, and on average an economic slump lasts less than a year. That means the one your family suffered when you were still in high school or college, which lasted 18 months, was an outlier. Unemployment peaked at 10% during the Great Recession, while it didn’t rise above 7% in the prior two recessions. “The chances are remote we would get another one like that,” says Matt Cooley, a certified financial planner and founder of Inspire Wealth Partners in Boise, Idaho.
Still, recessions can be a challenge if you don't do some advance planning. “Going through a recession requires two different mindsets. You need to play both defense and offense,” says Justin Brownlee, founder of Brownlee Wealth Management in Houston.
On the defensive end, you want to have a plan in place in case your office gets slammed with layoffs, or your commission-based business slumps as clients scale back spending. Offense is all about having the capacity to buy stuff you need when it goes on sale in a recession, like stocks that will provide the growth for your retirement decades from now, or the home that may be within reach if a recession scares off most buyers and puts sellers in a mood to negotiate.
Here’s how to make sure your financial plan is ready to play both defense and offense whenever the next recession hits:
Build Your Emergency Fund
Having cash on hand makes it possible to weather a layoff or a drop in wages without having to resort to running up credit card debt, falling behind on repaying student loans, or raiding your retirement savings. (That last one should be avoided if at all possible: you’ll face a penalty and a tax bill, and just as bad will have robbed yourself of the money that was growing for your retirement.)
Certified financial planner Scott Newhouse, founder of Forthright Finances in Thousand Oaks, Calif., recommends that if you work in an industry that tends to be more stable -- say a government job, or health care -- a cushion that can cover living costs for three months may be enough. But if your job is less secure, or if it's highly dependent on sales-based commissions, you'll want to aim for at least six months.
Stuck on how to come up with the extra money to put in savings? Often, taking a clear-eyed look at where your money is going today can highlight some nip-and-tuck opportunities. Justin Pritchard, a certified financial planner at Approach Financial in Montrose, Colo., recommends Tiller Money, a service that automatically tracks all your spending and income. “It’s easy to blow $60 in an evening," Pritchard says. "When a spreadsheet shows that worked out to $180 or $240 a month, you begin to see that’s real money.”
If you haven’t yet established an emergency savings fund, the best strategy is to set up direct transfers from your checking account into a dedicated savings account. Money recently ranked online banks that pay the highest interest rates on savings accounts.
Pay Down High-Rate Credit Card Debt
It’s always smart to make paying down high-rate debt a priority, but it's an especially key move ahead of a recession. The lower your balances, the more breathing room you'll have if you get waylaid at work. Granted, making a dent isn’t necessarily easy when the average interest rate on credit card balances hovers around 18%. You might want to check out Money’s top balance-transfer credit card deals; qualified borrowers can move their money to a top card and pay no interest for 15 to 18 months, which is a lot of time to turbocharge paying down the balance.
Be an Office Rock-Star
Put yourself in your manager’s shoes and think through a scenario where she has just been told she must cut her staff by 15%. Any chance you might be high on the out-the-door list, or have you established yourself as someone she'll do everything to keep? If it’s the former, now is the time to up your game, in effort, attitude and maybe even by adding to your skill set. “The more you know about your job that other people don’t, the more irreplaceable you are,” Cooley says.
At the same time, no amount of talent and effort buys anyone complete lay-off immunity. “Always have your next job ready,” advises Palbir Nijjar, founder of Smart Path Wealth Management in Pleasanton, Calif. “Know what you want to do next and increase your network with people who may be able to help you land that opportunity.” That’s smart throughout your career, but can be especially helpful if you do run into a recession set-back.
If you are laid off, exit as gracefully as possible. “Don’t burn any bridges,” Nijjar says. “Handling a job loss with class and professionalism will go a long way when a new opportunity comes along.” And for all you know, the person handing you your pink slip could be on the way out too -- and in a position to hire you at his next job.
Make Sure Your Stomach Is Ready for Turbulence
If you began investing after 2008, you’ve yet to gain first-hand experience living through a bear market in stocks. (We came close last fall when stocks fell nearly the 20% that officially signals a bear, but the market snapped back so quickly you may not have noticed.)
Yet like recessions, bear markets are a part of the normal economic cycle. And they have a habit of appearing during a recession or heading into one.
“The best portfolio is the one you can stick with through good times and bad times,” Pritchard says. That makes now a good time to check your comfort level with the amount of stocks you own. This isn’t about bailing on stocks, but right-sizing your stake now so you won’t panic during a bear market and sell after stocks have cratered.
Take a look at your current 401(k) and IRA balances. How would you feel if they were about 30% lower? Sam Stovall, chief investment strategist at CFRA Research, categorizes nine of the 12 bear markets since World War II as “garden variety” stretches that saw stocks fall between 20% and 40%. (Losses in the other three, including the last one, were larger). You likely own some bonds, which will temper your portfolio's losses, so 30% is a decent approximation of what you might encounter in the next bear market.
If that causes you extreme anxiety, a slight reduction in your stock holdings now -- when you can sell high -- is far smarter than panicking once stocks have already cratered. For instance, if you have 90% invested in stocks, you might consider rebalancing so your stocks are 80% or 85% of your overall portfolio.
If you're in a target-date fund through your workplace 401(k), that could involve temporarily switching to a fund designed for someone closer to retirement. For example, a 30-year-old might find that a fund intended for a 45-year-old offers a stock allocation that's more comfortable for riding out the storm (just make sure you don't wait too long to switch back once conditions have improved).
Buy Stocks on Sale
You no doubt have heard the saying that successful investing boils down to “buy low, sell high.” Well, bear markets are an opportunity to score some discounts. By the time retirement rolls into view, those shares will have appreciated, likely by a lot, and you can “sell high.”
“If you are planning on working for a couple more decades, a decrease in the stock market can be a huge gift,” Brownlee says. “While it's not fun to see your 401(k) drop in value, it allows you the unique opportunity to buy into stocks at prices that you may never see again in your lifetime.”
At a minimum, don’t reduce the amount you’re systematically piling into stock funds and ETFs, either through your 401(k) or IRA. Even better is investing more in stocks during a bear market, when they're in the bargain bin.
Make Big-Ticket Purchases at a Discount
Tara Unverzagt, a certified financial planner at South Bay Financial Partners in Torrance, Calif., saves her big-ticket spending for recessions. “When I remodeled my house, it was far easier to get a good contractor during a recession, and the subcontractors were willing to cut a deal to get the work,” she says.
That approach will also save you money if you are looking to buy your first home, your next car, or book a bucket-list vacation. Demand drops in a recession, which motivates sellers to offer up good deals and to be more open to negotiation.
Of course, if your purchase requires borrowing, you'll need to overcome lenders made (more) wary by the downturn. But nothing speaks louder than a shiny FICO credit score, and having as little existing debt as possible before you ask for more. That’s another reason to double down on paying off credit card debt and trim your spending today: so you can build up extra down payment savings for tomorrow.
“I figure I'm helping get the economy going again by spending money when other's aren't,” says Unverzagt. “But I have to save up and be patient to make this strategy work. It's just a reward for good planning.”