How to Protect Your Finances in Case of a Recession

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According to the financial news sector, it seems probable that we're headed toward a recession. Grim-faced economists think our current historic economic expansion is headed for a fall, and the news of a looming recession couldn't feel scarier.

There's good news and bad news about these opinions. The good news is that no one has a crystal ball, which means even the savviest of economic forecasters can't possibly know what our economy will do in the future. However, we do know that certain financial trends cannot go on indefinitely. (Remember in 2007 when we all thought housing prices could only ever go up? We learned the hard way in 2008 that nothing keeps growing forever.)

So how can you prepare for a recession that may or may not happen in a time frame you can't predict? Thankfully, there are a number of actions you can take today to protect yourself, and your finances.

Bolster your emergency fund

Financial experts recommend that everyone build an emergency fund that could cover three to six months' worth of expenses. Your emergency fund can get you through a period of unemployment until you land your next job.

However, losing your job during a recession could be a little more dire than losing it at any other time. When the economy as a whole has taken a hit, it can be much more difficult to find another employer who is hiring. This is why the median unemployment length during the recession was more than 25 weeks (nearly six months), whereas the current median length of unemployment is just over 9 weeks.

Now is an excellent time to add to your emergency fund. Start an automatic transfer to your savings account with every paycheck, and look for other ways to beef up that fund.

If you don't have an emergency fund that could handle a lengthy unemployment, there's no need to panic. Remember: anything you can put away will be helpful if you do find yourself with a pink slip. (See also: 7 Easy Ways to Build an Emergency Fund From $0)

Create your Plan B budget

Another proactive step to take is to map out what would change about your spending habits if you were to lose your job or take a pay cut. Going through your current budget and identifying the items you could cut can help reassure you that your emergency fund will weather a loss of income.

You could even challenge yourself to make some small cuts now and see if you miss your former expenditures. That can free up some extra money (more for the emergency fund!) and help you feel more in control of your spending now and in the future.

Attack your credit card debt

If you're carrying a balance on your credit cards, now is a good time to get aggressive with your payoff plan. Carrying debt into a recession could make for an overwhelming burden if you experience a pay cut or a layoff. You'd hate to find yourself unable to pay your credit card bills — and have to deal with debt collectors — when you're already feeling financially stressed. (See also: The Fastest Way to Pay Off $10,000 in Credit Card Debt)

Go to the doctor

The cost of health care can be prohibitively expensive, even for Americans with health insurance. According to a recent Bank of America Workplace Benefits Report, 53 percent of American employees have skipped a medical appointment, a test or procedure, or purchasing medication in order to save money.

This is why it's a good idea to schedule a checkup with your doctor now. Health care is expensive even when you have insurance, but it's even more expensive if you're uninsured. Getting a checkup while you have employer-sponsored coverage in place may head off any potential health (and financial) problems.

Resist the urge to tinker with your investments

Watching your retirement portfolio take a dive during a recession can be heartburn-inducing. It's easy to listen to that voice inside that's screaming at you to take your money out of the market or lose it all. But liquidating your investment accounts means you've turned your temporary, on-paper losses into permanent losses.

If we do go into a recession, plan on only looking at your portfolio quarterly — or even less often. This is one situation where putting your head in the sand will help your sanity and your bottom line.

If you're close to retirement, make sure you have cash

The only caveat to leaving your investments alone is if you're on the verge of retirement. Retiring during a recession can take a serious bite out of your retirement portfolio if you're still entirely invested for the long term. In that situation, you may find yourself retiring, but unable to access your retirement income because it has taken a recessionary hit. 

If, in the next few years, you'll need to live off the money that's currently invested, then make sure you transfer some of your investments into cash equivalents. These will remain stable and available for you even if a recession hits just as you're ending your career. (See also: 9 Creative Ways to Boost Your Retirement Savings)

Be prepared

While there's no way of knowing exactly what's around the corner, we can all improve our financial lives by taking simple precautions. Whether we're on the brink of a recession or the reports of the economic demise have been greatly exaggerated, you'll be glad you took these steps to protect your money.

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