How to Weather a Recession
The debate is on. Will we have a recession, soft-landing, rolling recessions, or something else? Regardless, the economy has slowed down and pockets of it will continue to slow down. Feeling unprepared? How to weather a recession so your finances can escape unscathed comes down to reviewing your finances and addressing weaknesses.
This wealth management checklist is a good starting point. Here are five other things to focus on:
Maintain Emergency Reserves
We’ve all heard the advice to have a sufficient rainy day fund in case of emergency.
A rainy day fund protects you from going into debt or selling long-term investments at a loss to cover emergency expenses. The Certified Financial Board of Standards recommends maintaining three to six months of living expenses in cash. Target a larger cushion if your income is volatile, if you have less job security, or if you have larger financial obligations.
Review your spending and dump the expenses you don’t need to bolster your savings.
Lines of Credit
Beyond your rainy day fund, having lines of credit to tap into for emergencies is a great way to weather a recession. In Using Debt Smartly to Build Wealth, I recommended that individuals establish lines of credit in good times in case they’re needed in bad ones. One of the most common sources of credit lines available to individuals is a home equity line of credit (HELOC), which allows you to borrow against your home equity.
Most HELOC lenders lend up to 85 percent of your home equity. For example, if your home is worth $500,000 and you have a $250,000 mortgage on it, your equity is $250,000, and 85 percent of that is $212,500. Besides your home equity, the lender evaluates your credit score, work history, income, and current debt.
HELOC rates are variable, meaning that, as interest rates increase or decrease, the loan rate moves accordingly. Rates vary widely, so it’s important to shop around. Some lenders offer introductory rates. Check the fine print to see what those rates will adjust to after the honeymoon period.
If you have a line, but your home equity has increased given higher home prices, take the time to reapply for a new HELOC and increase your emergency borrowing power.
How did your portfolio and investment strategy hold up during the last couple of bear markets? These are important questions as you figure out how to weather a recession.
For many investors, 2020 and 2022 were the first times to live-test their risk tolerance and investment strategy. It’s one thing to say on a questionnaire that you’ll buy stocks versus sell during a decline. It’s another to push the buy button and avoid the sell one when stuff happens.
Did you sell, hold, or buy?
If you sold:
- Create a plan to get back into the market because once bull markets start, they tend to run for a while even amidst investor skepticism (R.I.P. 2009 – 2020 Bull Market & Lessons Learned).
- If you have an advisor, work with them to reassess your risk tolerance and better position yourself the next time around.
- Hire an advisor if you don’t have one. An advisor who kept you from selling out of the market at the beginning of this year might have saved you ten plus years of fees.
- Learn how to avoid other Stock Investing Mistakes
Did you suffer permanent capital loss?
Stock market volatility is one thing, but as we’ve seen this year, investments rebound. That is unless they go to zero. If you owned speculative investments that did not make it, had a concentrated portfolio that hasn’t recovered, used complicated investment strategies that blew up, or had money you thought was invested safely in bonds that declined sharply, reassess!
Review Life and Disability Insurance
To weather a recession you may need to have the right insurance coverage in place.
With life insurance, the biggest obstacle is typically procrastination. Sure, some question whether they need what’s recommended, but it’s mostly just getting around to it. Cross it off your list now and move on.
With disability, the biggest obstacle is skepticism about whether the cost is worth it. I tackled this in Disability Insurance Overview and Tips, which also provides some helpful coverage guidelines.
One final note: if your life and disability insurance is provided through your work benefits, consider getting private policies. You don’t want to lose your job and coverage at the same time!
Maintain an Updated Estate Plan
Estate plans protect your family’s finances from your incapacity and death. You can plan for the inability to handle your own affairs so the courts don’t determine who will make decisions for you. Estate plans also protect your family in the event of your untimely death and ensure that your wishes for your assets and other things are followed. Health care proxies with living will language, durable powers of attorney, wills, and trusts should be created and up-to-date. Some further thoughts on the how and why are available in You Need an Estate Plan.
Kill Your 5 Year Plan
For the business owners out there, enough with the five year plans. This is exaggerated for effect, but whenever I hear about a five year plan to do something, I hear that there isn’t a plan. Five years is safe. It acknowledges the problem, but allows you to delay working on it.
Too many business owners talk about their five year plan to transition their business, retire, sell it, etc. They often pair it with wanting to get out before the next downturn. Well, the next downturn may be here for you and those five year plans are just as dusty and theoretical as they were before.
So, now what?
Keeping your business alive and recovering your prior profitability and growth rate are your main priorities right now, but carve out time before too long to make those five year plans tangible. Does that mean you have to sell or transition your business in five years? Absolutely not. It means you need to pull that project from the far away file and start chipping away. There are tremendous resources out there to help you. Use them.