The thought of another recession may be hard to imagine at this point. The economy has been growing for almost 10 years. Real estate values are at all-time highs and the stock market has grown since 2009.
However, the economy is cyclical and all good times eventually come to an end. In fact, in Bankrate’s latest Economic Indicator Survey, 52 percent of economists believe economic risks over the next 12 to 18 months are tilted toward the downside.
While it’s nearly impossible to predict when the next recession will occur, it’s important to prepare now when times are good.
Make these four moves now to prepare your finances for the next recession.
1. Build your emergency fund
You don’t want to think about losing your job or some other unexpected emergency, but it’s essential that you prepare for it.
If you’re unexpectedly out of a job because the economy is going through a difficult time, you may have a harder time finding a new job with the same level of income. Building an emergency fund to cover at least six months of expenses will help you sleep at night if the economic starts to decline.
If six months of savings is too audacious of a goal at first, start small by setting up a direct deposit into your emergency savings account. Also create a budget and analyze your spending to look for areas where you can cut back; put any extra savings into your emergency fund.
In the event of a layoff, you could get unemployment and hopefully a severance package, but have an established emergency fund is key if you’re unemployed for an extended amount of time.
2. Pay off debt if you can
Now is an excellent time to review your debts. Could you easily pay off some debts if you prioritized them for the next year? Could you consolidate several credit cards onto a no-interest credit card to pay it off faster? What if you paid off your business loan early?
There are a number of steps you can take to get out of debt. Two popular ones are the debt ladder and the debt snowball:
- Debt ladder: Start by prioritizing accounts with the highest interest rate. As you’re putting extra money toward that account, you make minimum payments on the others. When you pay off the account with the highest interest rate, move down a rung of the ladder and apply all your extra payments to the account with the next highest rate.
- Debt snowball: This method prioritizes paying down the accounts with the lowest balances first. You put extra money toward the account with the lowest balance, and once that one is paid off, you start attacking the next one.
If the economy moves into a recession, you wouldn’t want any debt hanging over your head.
Use Bankrate’s debt payoff calculator to see how you can accelerate your debt payoff.
3. Review investment risk
Review your investment portfolio to make sure it aligns with the level of risk you’re comfortable with. If you’re close to retirement, you likely don’t want to have all your money in riskier stock funds.
Think about how your investments would do if another recession happened. If you’re not comfortable seeing them drop as much as they did in 2008 and taking as long as they did to recover, you should think about a plan to get your money into safer investments over time.
You may be invested in real estate or taking on extra business risk. Take some time and be honest with yourself if anything your doing could collapse under negative economic times. Have you gone through worst-case scenarios? Are you realistic in your expectations for how long you can keep making money doing what you’re doing?
Use Bankrate’s asset allocation calculator to create a balanced portfolio of investments.
4. Pay more attention to economic news
You don’t need to be an expert to have an idea of whether economic times are good or bad. If you pay attention, even just a little bit, you can get a sense of how things are currently going.
Typically, before a recession, there are leading indicators that precede a recession. One of the biggest signs is an “inverted yield curve.” A simplified explanation for this is when the short-term loan rates (two-year Treasury) are higher than the long-term loan rates (10-year Treasury). Interest rates normally are higher the longer the term of a loan, but before a recession, they can invert.
To stay informed, you could occasionally search online for this term. If you start seeing articles that the curve is inverted, you know you have about a year or so get your finances in order because a recession could be coming.
However, it’s important to note that no indicator perfectly predicts recessions.
Be aware the economy has cycles. We have been in the growth phase of the cycle since 2009, and that will eventually change. Before the economy changes, take stock of your financial situation to make sure you’re prepared.