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Recession-Proof Your Finances

Experts predict an economic downturn within the next few years. Here’s how to make sure you’re ready.

Erin Lowry
Dec 13, 2018 · 6 min read
Photo: Shana Novak/Getty

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A recession is coming. I don’t have a crystal ball to predict the exact date, but still, I can tell you with absolute certainty that one will occur, because that’s just how the economic cycle works: After periods of growth, there are recessions. And with the stock market’s current and historic bull run of nearly 10 years, many people are predicting that we should all be bracing ourselves (and our bank accounts) for a downturn within the next few years.

Let’s start with the bad news: There’s only so much bracing you can do.“You really can’t make finances recession-proof, particularly if you’re doing what you’re supposed to be doing, which is investing for the future,” says Liz Weston, a certified financial planner and a columnist for NerdWallet (who, incidentally, graduated from college a few years after the recession of 1981–1982).

“Humans are generally bad at sticking to their investment strategies and become their own worst enemy when things get rough in the markets.”

Before working yourself into a full-fledged recession-focused panic attack, here’s the good news: There are ways to lessen the blow. Here are the steps experts recommend taking to mitigate the financial ramifications of a recession, no matter your stage of life.

Advice for Everyone

First, some universally applicable wisdom: Don’t let the threat of a recession push you into making any emotional decisions about your investments, says Douglas Boneparth, a certified financial planner and president of financial-advising firm Bone Fide Wealth.

“Humans are generally bad at sticking to their investment strategies, assuming they have one, and become their own worst enemy when things get rough in the markets,” he says. The best thing you can do is stay the course of consistently contributing to your retirement plan and other investments. If you find yourself tempted to do something drastic, avoid looking at your portfolio — or remind yourself that making a move out of fear is typically far more damaging than maintaining your status quo.

“Panicking and selling in a bad market is the big danger,” Weston says. “The problem is when the market turns around—and it will—it will do so pretty quickly. People who try to time the market almost always wait too long and miss the upturn.”

Advice for People in Their Twenties and Early Thirties

The fear of losing money when the stock market takes a tumble is, frankly, laughable to plenty of young people who are more focused on making ends meet and paying off student debt than investing.

For this group, one of the biggest threats in a recession is job loss. There are a few ways to prepare for that scenario, one of which is to focus on amassing the recommended three to six months of living expenses in an emergency savings fund. (Of course, if you’re contending with tens of thousands in student loans, it’s hard to justify or even afford saving that much at once. Your goal when in debt should be to save at least one month’s worth of living expenses or $1,000, whichever is higher, to cover basic bills and put food on the table.)

This takes us to point two: Have more than one stream of income. Especially if you aren’t confident in the security of your main gig, having a side hustle — which could include anything from driving for a ride share to freelancing to babysitting to selling items on Etsy to working part-time in retail — helps reduce the overall impact of getting laid off. It gives you cash flow while you’re looking for a new job.

For those who have started to invest, even if that investing is just putting a small percentage of each paycheck into your retirement plan, it’s important to keep investing throughout the recession. You should also check in on your asset allocation, or how much you have invested in different asset classes like stocks and bonds, which may need some tweaking as the economy changes.

“If you haven’t been paying attention, that bull market has probably dramatically increased the proportion of your money that’s in stock and put you at extra risk in a downturn,” Weston says. “You may need to sell some of those stocks and put more in bonds and cash. If you don’t have a target asset allocation, there are plenty of calculators to help you come up with one, or you can use a target date retirement fund to do the allocation and rebalancing for you.”

Advice for People in Mid-Career

For those who are further along in their careers, it’s even more important to avoid panicking and dramatically changing your investment strategy. You have less time in your forties and fifties to weather the volatility of the market and reach your retirement savings goal, so selling off stocks during a recession and trying to time getting back into the market later in could result in a massive blow to your retirement funds.

“You can’t control what the markets will do, but you can control how much you save,” Boneparth says. It’s also still ideal to have that three to six months’ worth of living expenses set aside to provide a buffer for your household in the case of job loss, especially if you’re part of a one-income family.

You probably have a good sense about how recession-susceptible your job could be, which may indicate how serious you need to get both bolstering your emergency savings and even considering finding another income stream. While jobs that perform necessary services, like medical professionals, electricians, plumbers, and educators, all tend to be more recession-proof, Boneparth explains, cyclical industries, like real estate, “are generally more susceptible.”

For those inching closer to retirement, Weston advises paying careful attention to your asset allocation. You also want to avoid being overly aggressive in stocks if a bear market is indeed on the horizon.

“You need to step down your exposure to stocks somewhat as you approach retirement, but you’re still going to need about half your portfolio in stocks even after you quit work,” Weston says. “That’s because you may have decades ahead of you, and you’ll need the inflation-beating growth stocks can offer.”

Advice for Retirees and Almost-Retirees

A recession can do serious harm to those who are rapidly approaching retirement or recently retired, which is why it may be prudent to push back a full retirement date.

“The first five years of retirement are pretty critical,” Weston explains. “If you retire into a bear market, you have a much higher chance of running out of money. That’s why it’s important to keep one foot in the job market with at least a part-time job or a profitable side hustle, so you can take some of the pressure off your portfolio.”

This may also be the time to bring in an expert. If you’ve never worked with a financial planner, at least a one-time session could provide a gut check on your retirement strategy.

For those who are already retired, Weston suggests trying to make sure essential expenses are covered by guaranteed income such as Social Security, pensions, and immediate annuities instead of drawing down on investments. This could mean a lean budget and fewer discretionary spending items for a while, but it will help offset the impact of a recession and make sure you don’t outlive your money.

No matter where you are in life, it’s important to keep one fact in mind whenever the next recession hits: “The key is to remember that this is temporary, and even if it takes a while, there will be recovery and future growth,” Weston says. “Investing in the stock market is investing in the productivity of the world, and that just keeps going up.”

Erin Lowry

Written by

Writer, speaker, and author of Broke Millennial: Stop Scraping By and Get Your Financial Life Together and Broke Millennial Takes On Investing.

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