(StatePoint) Experts agree that periods of economic downturn, or recessions, are unavoidable and often follow a period of market growth. However, experts also acknowledge that it is difficult to predict exactly when the next recession will begin.
It is important to manage the pieces of your financial life knowing that a market decline is possible, regardless of the exact timing. A Certified Financial Planner (CFP) can provide you with competent, ethical advice on how to financially prepare to weather a down market.
Here are five steps you can take today to get ready for a possible recession:
• Create or revisit your financial plan. Now is a good time to update your financial plan, including your savings strategy for retirement, to ensure it can withstand a market decline. If you do not yet have a financial plan, start working to put one in place ahead of a recession.
• Develop a cash flow. The simple technique of identifying how much money is coming in and how much is going out can help you develop a short-, intermediate- and long-term plan that keeps you in control of your finances.
• Maintain a healthy emergency reserve fund. If you are still working, maintain six to 12 months of expenses in a safe, liquid account. Retirees should aim to keep 12 to 24 months’ worth of expenses in reserve.
• Pay down your debt. While incurring debt can be a smart financial choice, carrying too much of it -- particularly high-interest debt -- can be dangerous, especially during a recession. Prioritize paying off your highest interest consumer-related loans (credit card and auto) and then work your way down to the lower interest ones. Try to avoid taking on any new debt.
• Maintain a diversified portfolio. Creating and adhering to a diversified portfolio spreads your risk across different asset classes. You may need to rebalance periodically by trading up assets to maintain your desired level of asset allocation. Be sure that your allocation is tied to your long-term financial goals, instead of basing it on the market’s ups and downs.
A CFP professional can provide you with guidance on navigating any of these financial moves to prepare for a recession. To find a CFP professional near you, visit letsmakeaplan.org.
The good news is that recessions do not last forever. Taking these proactive steps now will help protect you from significant financial damage and quickly recover from potential losses.
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