Predicting an economic downturn can seem as mystical and convoluted as reading tea leaves. However, the economic tea-leaf readers — financial experts — are warning that the economic winds are changing.
Even though unemployment is still low, there are other economic indicators causing financial analysts to predict lean financial seasons. First, economic growth has all but stalled. The rate of wage increase has stagnated. The Constant Maturity Treasury (CMT) rates, which are used to measure and predict future interest rates, economic growth, and output, are near flatlining — and threatening inversion. This means that as the economy continues to slow down, consumer interest rates will rise and investment earnings will lose momentum, possibly even losing money.
Preparing for a recession is similar to preparing for a tropical storm: There's no way to predict just how bad things will get, but burying your head in the sand and hoping for the best is a horrible idea. Here are a few things you can do to stormproof your finances against the coming economic slow down.
The first thing you do when prepping for a storm is prepare your home for the onslaught. People in coastal areas board up windows and surround their homes with sandbags. An emergency fund does the same thing financially. It's the added installation and protection that can assist you when the economy dips. It can't stop the winds, or prevent the rain, and it may not stave off all damage, but it does provide an added layer of protection. And it provides you a fighting chance to preserve what you've worked so hard to build.
The traditional emergency fund is anywhere from three to six months' worth of daily living expenses — and even larger for people with high expenses, large salaries, or a job that would be difficult to replace. During lean economic times, you want to save more than the standard recommended amount.
Under normal circumstances, the average bout of unemployment lasts roughly three to six months. However, experts believe that number is slowly creeping up and could double in a sluggish economy. It has been suggested that you plan to be unemployed at least one month per every $10,000 you earn. So if you earn $70,000 a year, you should plan for an unemployment that lasts at least seven months. This formula is a great gauge in helping you determine how much you need in your emergency fund. (See also: 7 Easy Ways to Build an Emergency Fund From $0)
Another thing people do during an impending natural disaster is purchase supplies and nonperishable food items. This ensures that they will have something to eat during a major power outage and food shortage. Adjusting your budget by reducing expenses in preparation for a financial disaster follows the same principal. Even though during a disaster you can't eat steak and lobster, you do still eat. The same is true when money is tight.
Your vacation and home improvement plans may have to wait. You may have to forgo expensive advanced educational programs and even take your kids out of private school. The key is to prioritize your expenses, see what extras you can cut, and be prepared to lower the ax when the time comes. It's also imperative that you stop living on overtime, bonuses, and side-gig money. You should divert that money into your emergency fund or other liquid savings. (See also: 5 Budget Overhaul Tricks for the Recently Unemployed)
You should also focus on aggressively paying down debt. If you can get rid of some of your smaller debts quickly, do it. The less people you owe, the better. And paying off debt acts as a type of de facto savings account, too. Sure, the money isn't in an account and available for you to access — but if you eliminate debt, you owe less and have more money at your disposal. You'll also save on the amount of interest you'll pay over time. Paying down debt is always a fantastic idea; however, it can be your saving grace during a recession. (See also: 5-Day Debt Reduction Plan: Pay It Off)
One nonfinancial thing you want to do when you feel the economic winds of change blowing is evaluate your career skill set. You have a primary job that you do. But you also have a bunch of little ancillary functions you perform. These things translate into job opportunities, or — at the very least — bullets on your resume.
Take time now while you are calm and things are going well to refresh your resume and sharpen or add to your skill set (just ensure you do it without adding debt). Most companies offer training of some sort, and many will also pay all or a portion of training you receive elsewhere. Some companies even have tuition assistance or reimbursement programs. Take advantage of those opportunities now, but be sure you read the fine print and understand the guidelines before you sign on the dotted line. (See also: These 17 Companies Will Help You Repay Your Student Loan)
The stock market usually tanks — or at the very least, becomes extremely volatile — during an economic downturn. Financial experts always advise you not to pull your money out of an investment in a moment of panic. Fear should never drive your decisions.
Go ahead and look at your investment portfolio now and see if there are any changes you'd like to make. Risky funds will probably lose money during a slowdown, but they also rebound quickly during economic recovery. And safer investments may not lose much, but you won't make much, either. They cancel each other out.
One system or investment style isn't preferable over another. They all have pros and cons and respond to the highs and lows differently. The key is to assess yourself. Will one heavy loss give you a heart attack? If so, go with something less risky. But if you're confident you can ride the wave and stand the turbulence of a risky investment, stay put. Be sure you consult a financial fiduciary and get solid financial advice before you decide. Knee-jerk reactions are the quickest way to lose big when it comes to investing. (See also: 8 Ways to Prepare for a Stock Market Dive)
Disclaimer: The links and mentions on this site may be affiliate links. But they do not affect the actual opinions and recommendations of the authors.
Wise Bread is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to amazon.com.