Rather than wait until the clouds are overhead, now is the ideal time to take a look at your savings, expenses, investments, employment and debt to see where you’re in good shape and where you need some work.
Warning signs
Although it may seem like we’ve only just recovered from the Great Recession of 2008, there are some significant indicators that another may be on its way.
- In August, the 10-year Treasury bond broke below the 2-year rate, also known as an inverted yield curve. This has been a fairly reliable early red flag of recession.
- Banks are nervous. Morgan Stanley called the risk “high and rising.”
- Rich people are spending less on luxury items such as fashion, real estate, art, cars and jewelry.
What steps can you take to ensure the smoothest possible ride through rough economic seas?
1. Increase your reserves
By now you probably know that conventional wisdom suggests keeping 3 to 6 months of living expenses in your emergency fund. If a recession hits and your job is in danger, you’ll want 6 to 12 months at the ready. Unemployment following the Great Recession lasted as much as a year for many, particularly older workers.
This cash is essential to avoid having to sell your future—your retirement investments—right when they may be at their lowest value. Likewise, if you put all your money into paying off debt, you’ll need to whip out the credit cards again to cover basic expenses.
2. Watch your spending
Here’s where you can be the most proactive. Don’t wait for the skies to get any darker, sit down and look over your monthly spending. Identify which expenses are necessary and which are discretionary. Food, rent/mortgage, lights and heat/AC are pretty much necessary. You may be able to eliminate or cut back on cable, dinners out and vacations. Also consider delaying big-ticket items like a new house, car or boat.
It’s also time to take a hard look at debt. First stop: your credit cards. Do your best to stop using them and start paying them off. Then move on to any other loans you may have, like auto, mortgage or student. Some have better terms than others, so read the fine print when deciding which to pay off first.
3. Network
As you’re going over the money you spend, it’s also worth considering the state of the money you earn. One of the first casualties of a recession may be employment. How confident are you in your job security? Even if all seems well, it couldn’t hurt to tune up that resume and start reaching out to others in your industry.
Employers are notoriously hesitant to bring in new talent during a recession, but are far more likely to do so from a referral. Take steps to help others and they’ll remember you when the time comes. Make introductions, share leads, buy a round of coffee. It will energize you about the work you do and improve the odds you’ll quickly land on your feet should you lose your job.
Networking can also be useful at your current job. Become indispensable at work. Everyone should know how good you are at your job, not just your boss or immediate team.
4. Make sure your money works for you
There are many things in life you can’t control (like the markets), but you have complete control over how you handle your money.
If you’re primarily invested in a traditional, pretax IRA or 401(k), you may want to convert it to a Roth IRA or Roth 401(k), as the Roth versions of both funds are more flexible when it comes to early withdrawals. They also have no required minimum distributions.
5. Above all, don’t panic
There’s no way around it—recessions are tough. If you have significant retirement investments, it takes an iron stomach to watch them plummet as the Dow dips. But the vast majority of financial professionals will tell you to stay the course. There may even be some bargains to be had, as the prices of certain investments go down.
No matter how volatile the markets may get, it’s always helpful to consult an advisor to make sure your portfolio is ready for whatever comes. TDECU stands ready to assist you with all the personal and digital tools of a trusted financial cooperative. Consider our wealth advisor checklist as a useful starting point.