How Finance Experts Are Preparing for the Next Recession
Updated: Jun. 15, 2022Worried that America is headed into its next recession? Here are some expert tips to make sure you're in the best financial position possible...just in case.
Is America headed for its next recession?
A quick search online would have you believe a recession is imminent. According to an Economic Policy Institute report published in April 2019, there is a “real possibility” that the United States could find itself in a recession as soon as the next 18 months. Lauren Anastasio, a certified financial planner with SoFi, a personal finance company that offers student loans, personal loans, investing and more, says while it’s hard to know exactly when, “what we do know for certain is that we will see another recession, and we just have to deal with it.”
With memories of the Great Recession of 2008 still fresh in many people’s memories, the idea of another recession is worrisome. So what should you do to prepare?
We asked financial experts to weigh in on how Americans should plan for the next recession. You may also want to consider these 12 recession-proof careers that will survive the next economic downturn.
Pay off high-interest-rate debt
“This should be a high priority regardless of where we are in an economic cycle, but it becomes ultra-important when we may be facing a period of contraction where employment is likely to fall,” says Anastasio. If you can’t pay off all debt, Tendayi Kapfidze, chief economist at LendingTree recommends consolidating debt or refinancing debt to lower interest rates. “This should also lower your monthly payments and make your monthly budget more manageable,” he says. You’ll also want to heed these 12 credit card rules you should never break.
Increase cash on hand
“Keeping cash on hand in case of an emergency is always recommended, but as we enter a potential period of lower employment, we want to have the largest financial cushion possible,” says Anastasio. Having easily-accessible cash can be a stress-reliever, knowing it’s there in case you need it.
Postpone large, unnecessary purchases
Anyone concerned about protecting themselves during the next recession should consider postponing any large, unnecessary purchases, says Anastasio. “For items you would be paying for outright, you’ll likely be happier to have the cash in the event of a recession,” she explains. “For anything that would be financed, you’ll be happier to have stronger cash flow and fewer bills should the economy take a turn.” These are the times you should never pull out the plastic.
Don’t mess with long-term investments
“If you’re uninvested when the market goes down, chances are you’ll still be uninvested when it rebounds,” says Anastasio. “If the people I had been speaking with six months ago who were concerned about being invested in the stock market pulled their money out, they could have missed out on double-digit returns this year,” she says. “Since we don’t know when the markets will swing, it’s best to simply get invested, and stay invested, with your long-term money,” she says. Speaking of retirement, you’ll want to avoid these top 15 mistakes.
Reevaluate funds needed for short-term needs
That said, if you do have investments earmarked for short- or mid-term needs, Anastasio does encourage consumers to re-evaluate their portfolios in anticipation of a recession. “Any funds you’re anticipating needing in the next two to three years are going to be safer in a high-yield savings account than in the markets,” she says. Putting all your eggs into one stock basket is one of the 11 worst mistakes first-time investors make.
Increase your earning potential
Because recessions can cause job loss or a reduction in income, Ethan Bloch, founder and CEO of Digit, recommends ensuring that you’re on a path to increase your earning potential over time. “What’s your line of work? What’s your job? What’s the education you need to continue down that path and where does that continue to go?” he asks. “The more time and energy you spend being intentional about the path, the better.” Knowing the business etiquette that will help you get ahead at work is one step toward success.
Build an emergency fund
After you’re out of debt, except for your mortgage, build an emergency fund of three to six months worth of expenses, advises Dave Ramsey, money expert, author of The Total Money Makeover, radio host, and CEO of Ramsey Solutions. How to do it? He suggests doing things like working extra hours, getting an extra job, selling things, avoiding eating out, cutting cable, and more. Ramsey Solutions also has an app called EveryDollar that lets you track transactions and build budgets. Digit is another platform that can help you build savings— and pay off debt—without you even noticing. The system analyzes your income and spending to find small amounts of money to safely set aside. To survive the next recession, you’ll want to know how to make a budget you can stick to.
Boost your retirement investments
“Load up your 401(K) and your ROTH IRA with mutual funds that have been consistent with good track records,” says Ramsey, noting that he invests in growth, growth and income, aggressive growth, and international funds. “Don’t ever invest in something you don’t understand,” Ramsey says. “Get with a professional who knows what they’re doing and takes the time to teach you.” You’ll also want to know the 23 secrets your financial advisor won’t tell you.
Refinance your mortgage
See if it’s possible to refinance your home loan to score a lower interest rate and thus your monthly mortgage payment, Kapfidze advises. This change could give you extra funds for regular expenses each month or to set aside for an emergency fund or other savings. Having a good credit score can help you get a lower interest rate.
Increase your possible sources of income
In addition to building on your earning potential at your current job, are there ways you can add additional sources of income as a safety net? Kapfidze recommends looking for a side hustle, like these 10 easy ways to make money fast, to give yourself an extra cushion.
Reduce your cost of living
If money gets tight, are there items that are stretching your budget too much, like the car you bought that you can’t really afford or an expensive apartment? “Even if it’s painful, would you be in a better place by reducing your cost of living?” Bloch advises to ask yourself. Try these 10 creative ways to save money that you hadn’t thought of before.
Move to a different state
According to LendingTree, there are 10 states that are at a lower risk for recession:
- Nebraska
- Oregon
- Idaho
- Georgia
- Minnesota
- Vermont
- Utah
- Washington
- Texas
- Nevada
State with the highest risk of recession include:
- Michigan
- Hawaii
- Montana
- Maryland
- Louisiana
- Kansas
- Illinois
- Delaware
- Oklahoma
- South Carolina
Don’t panic
“If the Gross Domestic Product (GDP) shrinks, or recedes for two consecutive quarters, we call that a recession,” says Ramsey, explaining that it’s two quarters: six months that the economy shrinks. “Nobody’s coming to your house to take your children. It’s not the end of the world.”
Anastasio agrees about a possible next recession. “A recession is nothing more than a natural part of a market cycle, so we shouldn’t panic. We just know that markets are going to go down at some point, and then they’ll go back up,” she advises. “The good news is that since we all know a recession will come one day, we can use that knowledge to our advantage and set ourselves up to weather the storm as best as possible.” If you’re not perfect with staying on budget, give yourself a break, after all, even money managers have made these 16 money mistakes.