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The prospect of another major recession looms large over the minds of almost everyone these days. Many people remember all too clearly what the last recession held for their finances and even their livelihood.
And unfortunately, recessions are a part of an economy’s lifecycle, so it’s likely that the next recession won't be the last.
For those that want to minimize its impact on their finances, you need to know how to ride out a recession.
You can ride out a recession by cushioning your savings and avoiding the payments that come with acquiring new debt. Keep investing wisely and avoid the tendency to sell when the market seems to decline. Most importantly, do not panic and keep managing your finances the same way you did before.
This guide will give you peace of mind to help you ride out the next recession.
How To Ride Out A Recession
The good news is that it’s possible to ride out a recession with minimal impact on your personal bank account. You simply have to take a few extra precautions and hold fast to your strategy for managing your money.
Here are our top tips to help you manage whatever may come your way in the financial future.
1. Cushion Your Savings
An emergency fund is key if you don’t already have one. The goal should be to save three to six months of expenses, but you can start where you are right now.
Start by saving around $1,000 or $2,000, this will help to protect you against many of life’s common emergencies, such as:
- A trip to the ER
- Flat tire
- Broken window
- A/C replacement
It’s also important to keep in mind that you might lose your job, and this savings account can help to cover the cost of your expenses while you search for a new one in a bad economy.
Having a flush savings account means that you won’t need to acquire debt in order to make ends meet.
Of course, if you need to spend money out of your savings account, you should make every effort to restore the balance as soon as you can. You never know what the future will hold, and a savings account helps you to better prepare.
However, try not to save too much money, either. Saving three or six months of your expenses is great, but you should not be saving your money forever.
This is because our dollars lose value over time, and the longer those dollars sit in a traditional savings account, the more value they lose.
So on top of saving effectively, the next best thing you can do with your savings is to put it in the right type of account.
A high-yield savings account like those offered by CIT Bank* will let your money work harder for you while it sits there waiting to be spent.
You’ll earn higher interest rates on your savings than you could get with a brick-and-mortar bank, making this an easy way to cushion those savings.
And while you still won’t fully beat inflation, your money will be earning more than it would sitting under your mattress or in a traditional savings account.
2. Avoid Taking On Debt
Chances are that you already know that debt is often problematic for your financial future, but do you know what happens in a recession?
Oftentimes, the Federal Reserve will raise interest rates, compounding the amount of money you owe on a credit card or loan. You will be paying off those purchases for months (or years) to come if you aren’t wise with your credit card spending.
Incurring debt doesn’t have to mean just credit cards though. It can also mean:
- Taking out a new mortgage
- Borrowing money for a business
- Taking out a personal loan
The interest rates on all of these endeavors are likely to be higher during a recession and you may deal with reduced income if you’re laid off from your job.
It’s a lose-lose situation when it comes to borrowing, so try to avoid taking on any debt until the economy improves.
3. Invest Wisely
It sounds backwards, but a recession is oftentimes one of the best times for you to invest your money.
Odds are that the stocks you want to buy will have lower share prices, as will real estate and possibly even crypto.
This is a great time to get in on some of the most lucrative means of making money, but don’t try too hard to time the market.
You could drive yourself crazy watching the tickers and hoping for the right entry point. If you use dollar cost averaging, you will likely find that you’re already ahead of the game.
Sometimes, you will get stocks at a higher price and sometimes at a lower one. The goal is just to keep pouring funds into your investment accounts.
Even if you weren’t investing previously, there’s never a bad time to start.
For those who want to invest in the stock market, M1 Finance offers commission-free trades, and once you fund your account, you can start buying fractional shares of nearly any publicly-traded company with just $1.
There are tons of options out there so you can find an investment strategy that works for you.
4. Don’t Panic
When many people hear the word recession, they tend to clutch their money to their chest and refuse to let go of it.
It’s certainly important to keep your savings account up, minimize debt, and continue to invest. However, you don’t want to become too extreme and end up panicking.
It’s a catch-22 when it comes to this tendency to panic. Many people will hear that a recession is on the way and immediately stop spending. This phenomenon can actually contribute to the development of a recession.
Instead, you should continue to spend but do so wisely. You may want to hold off on large buys that you don’t really need right away in favor of making more investments or padding your savings account.
Do what you can to make yourself indispensable at work and prove your value to reduce the odds of being laid off.
All of these actions can help you to minimize the impact of a recession on your finances, but panic should never cross your mind.
Move Cautiously – How To Ride Out A Recession
For many people, riding out the recession is as simple as staying the course with their current financial strategy.
You may want to emphasize savings and hold off on major purchases that force you to accrue debt, but you should keep on investing.
The important thing is to avoid panic, but you should still remain financially savvy and aware of what’s going on in the world around you.
It all boils down to one final statement: move cautiously. Continue on your path but keep in mind that things can change in an instant. Be prepared for what could come your way with some of these top tips for a recession.
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