Unemployment is at the lowest level since 2001, and we’re in the midst of the second longest-bull market in history—one that spans the entire post-college life of anyone 30 or younger. But we don’t have to look too far in the rearview mirror to be reminded that these good times don’t last forever.
It’s been less than a decade since the Great Recession happened and, before that, there was the dot-com bust in 2000. If history is any indication, there’s bound to be another slowdown at some point.
So how do you make sure all the hard work you’re doing now to get your finances into shape won’t get undone if the economy turns?
One of the best ways to protect yourself financially is to save three to six months’ worth of basic expenses in a high-yield savings account. This keeps you from having to rely on credit or tap investments in the case of an unexpected expense or layoff.
Any amount you can start saving now will put you on the right track—$1,000 is a good initial target, as it’s enough to cover minor car repairs and other expenses you probably didn’t budget for. Setting up automatic transfers to savings will help you stay disciplined.
You might be able to afford the rent or mortgage on a place that’s bigger than you really need now, but think twice before signing on the dotted line. Should an economic downturn jeopardize your job or nest egg, you’ll be glad you aren’t locked into a higher payment.
As a reference point: Most lenders suggest you spend no more than 28 percent of your monthly income on a mortgage. Investment advisor Dave Geibel recommends buying a starter home well within your budget and growing your equity (the amount you’ve paid versus what the home is worth) and savings before moving on to something bigger. Smart advice.
The truth is, pretty much every portfolio is affected by market downturns. But a properly balanced one—which should have a good mix of stocks and bonds to start—can soften the blow and recover faster as the market rebounds. “It’s also important to diversify between asset classes, owning small and large companies, domestic and foreign stocks,” Geibel says. Investing in low-cost index funds, which spread your money across hundreds of investments at once, is an easy way to achieve this balance.
It’s also important to remember that, historically, stock prices have always recovered from downturns and continued to rise. As long as your financial goals haven’t wavered, short-term market movements shouldn’t change your strategy.
Just like you want a well-diversified portfolio, it’s a good idea to diversify your income streams, too, whether that’s by investing in dividend-yielding stocks, picking up a side hustle or even purchasing a rental property.
Best-case scenario, you can use the extra cash to reach your goals faster. On the other hand, should one of these income streams dry up—or you lose your full-time gig—you’ll have other income to fall back on.