As you carefully manage finances for your household, media talk of a recession likely catches your attention. After all, any uncertainty in the market can unsettle the financial footholds you've been working so hard to gain.
But knowing how to prepare for a recession can empower you to handle the potential setbacks. You can start by focusing on constructive action, not letting your emotions get the best of you and sticking to your long-term planning goals.
Is a recession coming?
Economists differ on the odds of the U.S. heading into a recession in the 2020s. They're keeping an eye on risk factors like high interest rates and a handful of outlying banks that failed in an otherwise well-capitalized system with protections like
Review your investment risk tolerance
Risk is a fundamental element of investing as there's always a possibility that things won't go your way. Your investments could lose value, inflation could dent your returns or you could outlive your savings. People also have different
During uncertain economic times, you'll likely see some disappointing stock returns if the
If you're unsure about what to do with your money in a recession, set up a
Remember money & emotions don't mix
It's understandable to feel influenced by the negative feelings around the economy snowballing in the media. These emotions can tempt you to stray from the long-term financial plans you've built for your retirement savings and keep you from achieving other goals. If the next step feels like you should stop investing and hoard your money, take a moment to gain perspective. Discipline in investing, while certainly challenging, is key during a recession. Now more than ever, try to stick with your big-picture financial strategy and proactive investing.
Recessions typically last around 10 months, and the largest market gains often follow the largest declines. Consider that before 2022, the stock market had endured 13 bear markets since the end of World War II, as measured by the S&P 500 Index. It
Diversify your assets
It may be time, however, to adjust your holdings. It's a smart tactic to have your portfolio include a
Leverage dollar-cost averaging
You can also consider the
Amp up your savings & revisit your budget
Another way to financially prepare for a recession is to start putting money into an
To help divert money to your emergency account, take a close look at your budget. (If you don't have a budget yet, you can
You can look at other categories for cutting, too. If you see you're dining out more than you'd like, for instance, make a goal to cook at home or bring your own lunches. Or if your phone bill seems too high, challenge yourself to find a better deal with another carrier. When you go to review your budget each month, celebrate your progress as you watch your small changes add up.
Analyze & minimize your debt
Sometimes, taking on debt helps you reach important family goals, like buying a home or paying for college. Those things could be considered "good debt." But "bad debt"—where you're overextended on purchases that don't hold any increased future value—can inhibit you from spending, saving and giving according to your values. This burden can become weighty if money becomes tight during a looming recession.
Use your budget to keep track of your obligations and
It also helps to be aware of your
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Find a reliable financial partner
With all the uncertainties a recession can usher in, you want to feel secure in the financial company that's handling your investments and assets. To ensure you're working with the right partner, review the publicly available information about a prospective company's financial strength ratings, performance in recent years and capital reserves. You may also want to explore their investment philosophy and values to determine if they sync with your own.
Taking time to consider what to do before a recession can give you confidence to handle what's ahead, no matter the curveballs that may or may not come. A local