If the threat of a recession gives you pause when it comes to your personal finances, remember now is a time to prepare, not panic.
Worries about the economy increased Wednesday when a fairly reliable recession warning emerged from the bond market. Although it’s unclear when a recession might hit, financial experts say people should take certain steps that are beneficial in any economy.
The longstanding advice remains — stay the course on your financial plan.
“It’s hard just to do nothing,” said Dan Keady, chief financial planning strategist at TIAA. “The best investment strategy is a long-term one.”
If you simply can’t sit still, use this pressure as an impetus to check your plan. Are your goals the same? Are your investments allocated where you want them? It makes sense to periodically rebalance your portfolio to ensure your investments have not become too heavily weighted in one segment or another, particularly after a long stock market runup like the one in recent years.
Say, for example, you started with 60% of your nest egg in stocks and 40% in bonds. The stock portion could have easily jumped to 70% thanks to strong gains in the technology sector. Whatever the portion of your portfolio is in stocks, remember that it can lose 10% or 20% of its value regularly as recessions come and go. That’s the price investors have paid historically for the stronger long-term returns of stocks versus bonds.
Although it may be difficult, fight the urge to readjust your portfolio solely based on market conditions. People who sold during the last recession, for example, likely suffered a loss and then either missed out on major stock market gains in subsequent years or had to pay the price to jump back in.
One of the smartest moves anyone can make is to build an emergency fund.
A recession typically comes with job losses, and an emergency fund can be a lifeline for many families. Even those with good job security should take heed as everyone can feel an income pinch during a recession, as companies might eliminate bonuses, reduce overtime or slow pay increases, said Lauren Anastasio, a certified financial planner at SoFi.
Experts recommend having enough set aside to cover anywhere from three months to nine months of basic expenses.
Keep the money in an account you can readily access. Even in this low interest rate environment, there are some savings accounts earning near or above 2%.
Pay off debt
It is important to pay off any high-interest debts, such as credit card balances.
Americans dramatically reduced their debts after the last recession, but those debt levels have inched back up. This can be costly as the average interest rate on a credit card is 17.82%, according to Bankrate.
Paying down those debts will not only reduce the amount paid over time, it also frees up available credit that may be needed in the pinch ahead. That is important as banks tend to tighten lending during recessionary periods, so it could be harder to get a loan or line of credit.