In my last post I mentioned the newest indicator that a recession is potentially on the horizon. While it is not certain that a recession is neigh, there is still plenty you can do to prepare. Even if a recession is no where close, every step you take to prepare for the recession will ensure financial independence during the best of times.
1) Pay Off All Adjustable Rate Loans
Adjustable rate loans can be great financial tools, but only for loans that will only last a few years. People tend to spend less on these loans than fixed-rated loans. However, Nerdwallet points out that adjusted rate loans are notorious for causing home foreclosures during the recession of 2008. They are not as regulated by the government and are prone to change during a recession.
I never recommend going with an adjustable rate when it comes to a home mortgage. They can last over a decade making it likely that the mortgage will be around during the next recession and suddenly change rates. The other common adjusted rate loan most people have are credit card loans. If a recession could happen then all the more reason to make sure they are paid off.
2) Make Sure You Are Living Below Your Means
Remember when I recommended living below your current means? That’s because your current living standards may fall exactly where your means are during a recession. Try not to take out any loans you do not need. That means cars are a no go. You need to make sure you are not living paycheck to paycheck, so make sure you have a sound budget.
Although recessions will force people to live below their means when they come knocking on the economy’s door, just starting to live below your means during a recession will put massive strain on your finances. It is imperative to always live below your means, even during good times. Then when a recession hits, you are more likely to be living within your means instead of above them.
3) Pull Out Any Money You Need In The Next 5 Years
I never recommend investing money that you may need in the near future. If you have though, it is imperative you take it out now. Not from your retirement fund though.
4) Make Sure You Have Enough In Savings
Whatever you plan to do in the near future, you should assume the cash flow you had during the growth of the markets is gone. Therefore, you may have to rely on savings much more than you normally do.
This is usually only the case if you live above or within your means, but if you have an emergency, it is far better to pull money from your savings than to hope that lenders will be happy to give you money during a time when money seems scarce.
5) Prepare To Invest
This may sound weird since I just recommended guaranteeing your savings. However, there will be sales in the market. You can buy stocks and other investments cheaper than previously. According to Forbes, a recession will last on average 18 months and will have longer times of economic growth afterwards. Even if you do not buy low the market will rebound.
The word recession is one of the most negatively associated words known. However, it is a natural part of any economic cycle. It is not something to fear, but instead prepare for. Don’t just take my advice, many financial advisers will give good advice to survive recessions. Suze Orman gives excellent advice on how to survive a recession as she wrote about how to survive the 2008 recession, one of the worst economic downturns in history.
However, she writes much more about personal finances. If you own a business there is far more you need to worry about. I recommend reading books in which deal with that since you will have to deal with lay offs, even more significant job shocks, closings, and other catastrophes. You will need even more expert advice.
Do not worry about recessions too much, if you prepare ahead it, should not even feel like you are in a recession much at all. Preparation for the worst will make sure you stay on the path to forge your wealth.