Five Ways You Can Help Recession-Proof Your Finances
Preparing for a recession is like preparing for a storm: You can’t be certain when it will happen, and you want to assemble all the gear you need until it blows away.
The U.S. economy has been on a 10-year roll of continued growth. But anyone who has studied history and economics knows that economic expansion does not last forever.
In the normal business cycle, a period of growth is typically followed by a shorter period of contraction, followed by another period of growth and then another period of contraction, and so on and so forth.
So, it is a pretty good bet that a recession will come again. We just don’t know when.
No one likes to be on the negative side of a downturn in the economy, such as losing a job. However, on a macro basis, recessions serve a healthy purpose of eliminating businesses that are not well managed and not contributing adequately to the growth of the economy.
Preparing for a recession is kind of like preparing for a winter storm. You can’t be certain when that storm will blow in, but you want to make sure you have all the gear needed to last until it blows away.
Remember Aesop’s Fable The Ants and the Grasshopper? The ants did what was needed to become recession-proof; the grasshopper did nothing.
Here are five things to look at to help weather a recession.
Tip #1 to Recession-Proof Your Finances: Prepare based on your job
Not all jobs are equally affected by recessions. For example, if you work for a hospital, you are less likely to be affected by a recession than if you work for a vacation resort. If money gets tight, people can put a vacation on hold, but they can’t do the same with medical emergencies. Individuals who work in recession-resistant industries are already in good shape when the storm comes in. Those in recession-risky jobs need to be best prepared for being hit by the storm.
Tip #2 to Recession-Proof Your Finances: Leverage can hurt
When times are good, it can be tempting to borrow as much as you can for investment purposes. After all, the more you borrow, the more you can buy. However, leverage works both ways. When values go down, those who borrowed as much as they could might find all their equity wiped out.
That is what happened during the Great Recession of 2008-09. Thousands of people found themselves living in homes worth less than the amount they owed. One of billionaire investor Warren Buffet’s best-known sayings is: “Only when the tide goes out do you discover who’s been swimming naked.” Avoid the temptation to max out your borrowing and you can weather your way through a recession.
Tip #3 to Recession-Proof Your Finances: Buy, don’t sell
When people see their investments go down, and down, and still farther down — as can happen during a recession — it is common to panic and sell off investments and move them into a less volatile option, like Certificates of Deposit. Remember, the only funds you should invest in the stock market are those that you don’t need access to for five years or more. If you need the money within a five-year window, it should not have been invested in the market in the first place.
Markets go up and down, and if history can be a guide, markets go up more than they go down. Those who were patient when the market tanked in 2008-09 saw their investments rebound over time. In fact, a lot of investors do extra investing during recessions because that is when prices are down. It’s like buying when things are on sale.
Tip #4 to Recession-Proof Your Finances: Cash is king
The worst thing that can happen to most people during a recession is to experience a job loss. It’s a bad time to be looking for a new job since businesses are cutting back on their expenses in order to survive the recession. This is when having an emergency fund comes in handy. The most common recommendation is that households work to build up an emergency fund equal to three to six months of expenses. It’s no fun looking for a new job, but an emergency fund lets you be a little more picky, so you can find the job that is best for you — not just the first one that will pay the bills.
Tip #5 to Recession-Proof Your Finances: Invest in yourself
Prepare for the future by adding skills and knowledge. The more you know and can do, the more value you have — and, ideally, the more money you can make. While Netflix and online gaming might be an enjoyable use of your time, earning a professional certification or license can translate to money in the bank.
Recessions have been around for centuries — The Ant and the Grasshopper story is 2,500 years old! — and they can be expected to continue in the decades to come. Be the ant.
Please refer to the Deposit Account Agreement, Account Disclosure, Deposit Rate Sheet and Personal Account Schedule of Fees available in the Zions Bank Agreement Center.
Don Milne is Financial Literacy manager for Zions Bank.