What to do with savings and investments before a recession?
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In recent years I have done everything to strengthen my entire financial portfolio. Because I spent most of my 20s making money mistakes (from not not having an emergency fund or retirement account to running up credit card debt), I vowed to be more strategic with my money in my 30s.
Now that I’ve laid a good foundation, a solid budget that I follow most months, and find new ways to earn passive income, I’m looking for ways to secure my finances in case of another pandemic or emergency
interrupts my ability to make money; I lost part of my income at the beginning of COVID and I don’t want to repeat this experience.
With the talk of a recession on the horizon, I decided to talk to financial planners to learn more about how to align and transform my investment, retirement, and personal savings strategies.
I’ve been keeping a close eye on my personal finances and trying to get back to a tight budget to prepare for a recession. Lately I’ve been wondering if I should be doing more.
Financial planner Jay Zigmont says preparing your personal savings for a possible recession requires a few key steps: Establishing a budget; pay off debts; and building your emergency fund.
“For most people, the biggest impact of a recession would be job losses,” says Zigmont. “If you lose your job, you’ll be glad you did those things.”
Financial planner Adam Deady agrees and recommends making plans now to pay off debt when the economy is strong. If it hits a recession, Deady says fully funding an emergency fund should be a priority.
“If you can pay off that type of debt by the next recession, it will make it a lot easier to pay your expenses if your income drops for any reason or for a period of time,” says Deady.
If you already have three to six months of expenses saved in your emergency fund, financial planner Danielle Miura recommends preparing to add an additional month of expenses to that account.
“It can give you the protection you need so you don’t have to worry about additional liabilities in a downturn,” says Miura.
As someone who only started investing a few years ago, I wondered if I should do something with my money that’s on the market if a recession hits.
Financial planner Dustin Newton says if you’re investing for the long term, you shouldn’t panic about a looming recession. While you might want to dump some investments when you need the money, stick with a strategy that encourages you to sell when prices are low.
However, Newton says that if you have money to invest, you should consider buying recession-friendly sectors (like consumer staples, utilities and healthcare). Stocks that have been paying dividends for many years are also good choices, as these tend to be long-established companies that can weather a downturn.
Outside of stocks, Newton advises buying real estate.
“When a recession hits and property values fall, it can be an investment property buying opportunity. If you can rent a property to a reliable tenant, you’ll have a steady stream of income while you weather the recession,” he says to Newton.
If a recession hits and I lose revenue, I may have to adjust my entire financial strategy. Despite having the lofty goal of retiring a millionaire, I’ve been wondering if a recession would mean I should pause contributions to my SEP IRA retirement account.
Miura says that might not be the best idea, as continuing to invest in your retirement plan will help you reduce the average dollar per share in your portfolio. If you work for a company that qualifies for 401(k) contributions, you should definitely not stop contributing.
“In the long run, you will benefit greatly from your contributions,” says Miura. “It’s important that employees continue to take advantage of employer benefits and strive to get free money wherever they can.”