If you want to improve the chances that you make it through the next recession with your finances intact, here are 10 steps to take now.
1. Save More
It seems painfully obvious that you should save more of your income to shore up against economic difficulties. However, the personal savings rate was 2.5% as of the end of the first quarter. That means that most Americans just aren't saving enough. You should save at least 6% of your income. Saving 10% (or more) is better.
2. Diversify Your Investments
Are your investments sufficiently diversified? Review your investment portfolio and consider rebalancing. You want a portfolio that is diverse enough to handle some of the difficulties that can come with a tumbling market.
3. Hedge Your Bets
You can also diversify into investments that are considered hedges. Although you'll want to take into account your own situation and risk tolerance, there are some interesting investments that are considered hedges against economic situations. Gold is often seen as a hedge against inflation (which can be a byproduct of economic stimulus efforts during a recession). The CBOE Volatility Index (VIX), also known as the 'fear index,' can be an interesting hedge against wide swings in the markets.
4. Retain Some Liquidity
Most of my emergency fund is actually held in a taxable investment account. However, that's not particularly liquid -- it can take more than a week for my transaction to settle and the money to transfer to my primary checking account. In order to hold me over, I have a small amount of cash immediately available in a high-yield account accessible by ATM card.
Retain some liquidity so that if a recession hits you where it hurts financially, you still have options and immediate access to cash.
5. Diversify Your Income
While you are diversifying your investments, consider diversifying your revenue streams as well. Don’t rely solely on a day job for all of your income; consider other types of income (dividend stocks, bonds, real estate, etc.), and even start a side gig. Create multiple revenue streams so that if one income source is hit hard during a recession, you have other sources to fall back on. This is one of the smartest moves you can make before the next recession.
6. Think Twice About Taking On More Debt
Some types of debt, when used properly, can be helpful as you use leverage to your advantage. However, if you know a recession is coming, it's a good idea to think twice about taking on more debt. During a recession, you don't want to be bogged down by obligations.
7. Downsize
As part of your effort to whip your finances into sustainable shape, downsizing can be a great strategy. If you can make do with less stuff, live with a smaller home, or get by with one less car, you can improve your finances. Or, if you already live modestly, fight off the urge to 'upgrade.' For example, my family lives comfortably in what many consider a small house. We could 'afford' something larger, but what happens if a recession affects our finances? We could quickly find ourselves out of our depth.
8. Invest In Income-Producing Assets
Don't wait until the next recession to start buying income-producing assets. Now is the time to prepare. Whether you decide to purchase a rental property (while real estate values and mortgage rates are low), build a dividend portfolio, or dabble in peer-to-peer investing, now is the time to build some passive income.
9. Create Emergency Stores
It's not a bad idea to build home food storage. If you have food storage, and the recession hits your finances, you won't be as stressed when it's time to go to the grocery store. Start with a little bit at a time. This can serve as double protection against recession and against natural disaster.
10. Have A Backup Plan
Be sure that you have a backup plan for your finances. Whether you develop marketable skills and gain a better education, or whether you have an idea of which investments to sell first for cash, you need to have a backup plan -- and it's probably a good idea to have two or three backup plans.
The Investing Answer: We don't know when the next recession will strike, but we do know that it is all but certain there will be one. You can prepare yourself now for the inevitable by taking sensible steps to improve your portfolio and your finances.
