Inflation is up, the market is down and now there’s talk about a recession! Just the idea of a recession makes the calmest person sweat. And what if a recession is coming? Is there something we should be doing to prepare?
Yes, there are a few things you can do to prepare for a recession. However, first things first: don’t let it steal your joy!
First, what is a recession?
The National Bureau of Economic Research defines recession as two consecutive quarters of decline in real GDP. What that means is that there is a slowed production of goods and services for six months. And while a recession is a “four-letter word”, it really is a natural economic cycle. In fact, there have been thirteen recessions averaging 10 months since World War II, including the COVID-19 Recession. Learn more about prior recessions by clicking here.
What should you do to prepare for a recession?
It’s always good to be prepared, but right now is a good time to take inventory of where you are financially.
- Build up your Emergency Cash Position (ECP)- Now is a great time to make sure you have AT LEAST six months of living expenses saved in your savings account. If you can even save more, then DO IT!
- Pay down debt- If you are working on paying down debt, continue to chip away at it the best you can. Especially debt that carries a high interest rate, like credit cards.
- Continue to save in your retirement plan- If you are working and are contributing to a 401(k) or any retirement plan, now is not the time to stop. While the market looks concerning to you, it is basically on sale right now! Continuing to buy shares of the investments at various share prices intermittently is a well-known investment practice called “dollar cost averaging” and is beneficial to the investor by driving the average share price realized down.
- Put off buying those big-ticket items if you can- If you have been thinking about making a large purchase, like a car or a home renovation, perhaps waiting to see if the economy stabilizes and inflation retracts before doing so. It may be prudent to not overextend yourself today.
You don’t have to wait for a pending recession to put your finances in order, but the current economic environment is a good reminder that it’s a good time to start preparing today.