I get a nasty feeling the economy is shifting and we’re heading for tough times. I was not financially prepared for the last recession, and I struggled for a couple of years. Not only did my investments get beat up, but my household finances got tight too. If I’m correct, and the economy is about to enter a recession, how should I prepare my finances so I don’t repeat history? I feel like the economy could get ugly this coming fall.
I stopped making market predictions over 10 years ago, but I have to admit I’m feeling what you’re feeling.
Preparing for a recession is a lot like buying life insurance. Buying it early is smart, buying too late is, well, too late. Hopefully you’ve been preparing for the next recession since the last recession. Being prepared will spare you to some degree, but you can only weather a storm so well.
Your investments will take a beating. Everyone’s will. The same thing happened with the last recession, but if you held on to your investments and didn’t sell them, they’ve recovered by now. A recession can actually be a really good thing for your financial life. Hear me out.
There are a few silver linings to a recession, the first is the general tightening of the belt. If it takes a recession to get you to budget, so be it. Whether the motivation for spending less is because of a loss of income or a fear of the financial climate, a good behavior change is a good behavior change. A second silver lining is buying in a down market. Buy low, baby.
Recession or not, a good way to measure your financial success is by measuring your dependence on your income. This is the rate at which you depend on your income to support your lifestyle. If you are regularly contributing 5% of your take-home pay to a savings account, you are dependent on 95% of your income. The lower you bring down your dependent income percentage, the more likely you’ll be to weather all kinds of financial storms.
Reality is, the only thing you can do to truly make yourself recession-proof is to hold on tight and ride it out. Stay strong, don’t sell. You’ll recover.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.