Guard Your Finances Against a Recession
A vital step of financial health is ensuring you guard your finances against a recession. In this article, we will go over 5 steps you can take to help minimize losses in the face of a recession.
1. Monitor Your Cash Flow
Your cash flow is how much money you are earning compared to how much money you are spending. Monitoring your cash flow allows you to better understand your financial standing. It allows you to calculate how long your savings will last with your current spending. Additionally, you can set budget goals, reduce your spending, and increase your saving. This will help your funds to last you longer if things get tight due to a recession. Apps like Mint can help you to set budgets and track spending on all types of categories. They can be very useful tools.
2. Max Out Your Emergency Fund
The best way to guard yourself against any type of financial strain is with an emergency fund. This is a special savings fund with money you set aside specifically to cover your living expenses in a tough situation. Experts suggest you should have at least 3-6 months’ worth of expenses saved. Building up this fund should take precedence over any other type of saving. That way if an emergency hits you are ready. You can utilize the money in that fund as opposed to covering your expenses by using high-interest credit cards.
3. Eliminate Debt
Once your emergency fund is sufficiently built up, your next priority should be to pay off debt. This should be done starting with the highest interest accounts first. Eliminating debt is important because it reduces your monthly bills if money gets tight. This allows you to have more to go towards necessary living expenses. It also helps eliminate the worry of having enough to make minimum payments. Missing these payments has a negative effect on your credit score and will hurt you in the long run.
4. Review Your Asset Allocation
Reviewing your asset allocation is something you should so at least annually. It is also an important step when you are trying to guard your finances against a recession. You should check to make sure that your asset allocation matches your risk tolerance and time horizon. If you are nearing retirement and fear a recession is looming it may be wise to go for more conservative asset allocation. This helps to hedge against losses. On the other hand, if you are a younger investor you have a longer time horizon during which you can recoup losses. This allows you to ride out a recession with a more aggressive portfolio.
5. Do Not Abandon Your Plan
When it comes to handling a recession, all you can do is prepare. If something unexpected happens, the worst thing you can do is panic and make a rash decision that goes against your plan. Selling assets at the bottom of the market can really hurt your finances. Be patient and remember you will have the opportunity to recover those losses when the market recovers.
You Can Guard Your Finances Against a Recession
No matter how much you try to prepare, you cannot provide yourself with 100% protection against a recession. However, if you implement the 5 tips in this article, you can help to minimize your losses.
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