4 ways to recession-proof your finances


There's a lot to feel good about given the current economy. The past decade has been great for investors, for example, and we're living in a golden age for job seekers.

But almost three in four economists predict there will be a recession by the end of 2021. Typically, recessions come with rising unemployment and stock market declines, which can in turn make it tougher for people to keep up with both current bills and long-term financial goals.

Taking some steps now to improve your finances can help you stay on track through tough economic times, experts say.

"This might be the time to shore up a few things," says certified financial planner Shannah Compton Game, host of the Millennial Money podcast. It's an exercise in "getting back to the basics," she says.

Here are some moves Game and other experts suggest you make now in the event of a downturn.

1. Build up a cash emergency fund

No matter the economic environment, experts recommend that you add to your emergency fund. In good times, that money is a buffer for unexpected expenses like an emergency car repair or medical bills. In a recession, it can also buy you some time to figure out next steps if you lose your job.

"Build a strong emergency fund," says Game, who suggests that you aim to save enough to cover six months' worth of expenses. That's the upper end of the three-to six-month range advisors typically recommend.

Keep the funds in a savings account so that they are readily accessible. Douglas Boneparth, a certified financial planner and founder of Bone Fide Wealth in New York City, says that "liquidity is extremely important," so that you don't need to worry about selling investments to come up with money to pay rent or buy groceries.

Now is also a good time to set up an automatic savings plan, which will regularly transfer money into a savings or retirement account. Start with what you can, Boneparth says, with a goal of saving 10% of your monthly income.

2. Get spending and debt under control

An emergency fund is important — but perhaps the only financial tool that's more important is a budget. "Know your numbers — know how much you need to make to cover all of your expenses," says Game.

Having a good sense of your regular expenses can make it easier to quickly identify places to cut back if needed. And reining in your spending now could give you extra cash to help you build savings and pay down debt ahead of an economic downturn.

As part of your spending assessment, consider how much of your monthly income goes to debt repayment, including your mortgage, auto loan, and credit cards. Working to pay down balances faster could give you more budget flexibility. Banks tend to tighten lending standards in a recession, so now is also a good time to consider moves like refinancing, to make your monthly payment more manageable.

Know your numbers — know how much you need to make to cover all of your expenses.
Shannah Compton Game
Certified financial planner

3. Diversify your income

"Any extra money you have every month to play with helps if you get into a situation with a layoff," says Game. Look at ways to earn more, whether that be through a side hustle or a part-time job. It can be lucrative — the average side hustler earns an extra $686 per month, according to data from Bankrate.

Learning additional or complementary skills from a side hustle could also help you remain employed, by making you more valuable to your current employer. And it can open up opportunities to pivot to a different field or industry, if yours is particularly hard-hit in a recession.

4. Review your investments

Recessions are often, but not always, accompanied by big declines in the stock market. So it's smart to be proactive and review your financial plan. Advisors generally recommend you review the portfolio mix in your retirement or investment accounts on an annual basis.

"It may make sense to reassess your risk tolerance," says Boneparth — and maybe, your investments. For example, pros often suggest investors shift their mix to include more bonds and cash as they approach retirement. Consider working with an advisor to help you determine the right strategy for your goals.

But keep in mind that while a recession can be scary, it can present an opportunity for younger investors who have decades ahead of them. Continuing to invest during a downturn helps set you up for success when the economy, and the markets, recover.

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