In an economic climate where inflation has cooled significantly and the Federal Reserve seems to be on a path to further increase interest rates, concerns about a recession become valid. While we can’t predict the future, preparing for the worst while hoping for the best is a sound strategy.
During tough economic times, your financial plan’s resilience can be tested in ways you may have not imagined. Emotions can become heightened and influence financial decisions. But don’t worry! If you’re looking to prepare for a recession, there are 6 smart steps you can take now to manage your emotions and help bolster your finances.
6 Ways to Recession-Proof Your Life
1. Practice Mindfulness to Make Better Money Moves
- Be Aware of Your Reactions: Your natural reactions may lead to disengagement from your finances or panic selling, neither of which is ideal.
- Keep Your Long-Term Goals in Focus: Instead of succumbing to fear or anxiety, practice mindfulness. Reflect on what’s driving your choices and whether they align with your long-term interests. Developing this discipline may help you avoid emotional money moves you may regret later.
2. Get a Financial Plan or Stress-Test the Plan You Have
- Build and Adjust Your Plan: Knowing where you stand and having a roadmap to a secure financial future is essential.
- Prepare for Emergencies, Protect, and Grow: Balance your present needs with future goals. Play around with estimates, like being out of work for 6 months, and see what it means for your finances.
3. Look for Ways to Spend Less or Earn More
- Spending Less: Assess your spending versus your income. Even having a rough idea can help you control your spending.
- Follow Guidelines: Consider adopting guidelines like Fidelity’s 50/15/5 plan to pay for essentials while saving for the future.
4. Bolster Your Emergency Fund
- Save for Essential Expenses: Aim to cover 3 to 6 months of essential expenses, but even starting with $1,000 can be helpful.
- Keep It Accessible: Keep a significant portion in liquid savings or low-risk investments so that it’s easily accessible if needed.
5. Try to Stay the Course with Your Investments
- Believe in Long-Term Growth: Market volatility is natural, and the stock market has historically had more up years than down.
- Avoid Timing the Market: Stick with your investment plan. Missing just a few of the best days can affect long-term returns significantly.
- Learn from History: Remember that historically, the market has produced positive returns following significant corrections and bear markets.
Stock market trade-offs
| Historically, on average, investors | |
| have received: | have tolerated: |
|---|---|
| ~8% annual return | 3 downturns of 5% per year |
| Positive calendar returns ~75% of the time | 1 correction of 10% per year |
| 1 correction of ~15% every 3 years | |
| 1 bear market greater than 20% every 6 years | |
6. Update Your Resume and Sharpen Your Skills
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- Prepare for Layoffs: Even though the labor market looks strong with 9.8 million jobs open as of May 2023, it’s wise to be prepared.
- Refresh Your Resume: Updating your resume and skills will ensure you are ready, whether facing layoffs or just looking for a change.
Median returns following large stock market selloffs (1950–2022)
Hypothetical growth of $10,000 invested in the S&P 500 Index, January 1, 1980–June 30, 2022
Conclusion: Cope with Tough Financial Times
Recessions are part of the economic cycle, and while bull markets end, so do bear markets. Economic expansions contract into a recession, but growth starts again. The best time to plan for the worst is when everything is going great.
By practicing mindfulness, building a robust financial plan, managing your spending, saving for emergencies, investing wisely, and keeping your resume updated, you can recession-proof your life.
Remember, working with a financial professional to either start or strengthen your financial plan is always a beneficial step. Your future self will thank you for the decisions and preparations you make today. Stay strong, stay informed, and stay prepared!
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