The fact that there will be another recession is easy to predict. When it will happen . . . that’s a different story.
The fact is, we’ve just staged the fastest recovery from a recession (February-April 2020) in history. Still, the signs are there. Inflation’s at a 40-year high. The Fed’s raising rates faster than it has since 2005. And many believe taxes will, sooner or later, rise to pay for years of needed stimulus.1
Is a recession inevitable in the short term? Of course not. But it’s better to be safe than sorry when it comes to riding out today’s economic and political turbulence.
Here are five tips to help make your balance sheet a bit more recession-proof:
1. Shore up your emergency fund
Though conventional wisdom recommends having three to six months of your essential expenses tucked away in an emergency fund, the pandemic has led some people to try to save more — up to a year’s expenses, in some cases.
That may seem daunting. But saving, even more than investing, is critical to your long-term financial independence. Consider saving at least 15% (though 20% is better) of every paycheck — make your savings the first “bill” you pay! Then, use that to build up a contingency fund.
That way, you can be ready for anything, from unexpected health issues to a recession-driven cut in income.
2. Pay off credit card debt
Having high-interest debt can be sneaky costly. And with the Fed’s recent rate hikes, those sky-high interest rates could go even higher. Eliminating credit card debt can make it easier to contribute to your emergency fund, too.
One important note: Eliminating debt that comes with double-digit interest doesn’t mean paying off ALL debt. It doesn’t mean paying off your mortgage in 10 years instead of 30. Or zeroing out a sub-prime equity line. It may be wise to keep taking advantage of such low-rate debt, and the attractive tax deductions that can come with them!
3. Put the brakes on lifestyle creep
Be honest: As your income goes up, does your spending follow?
Experienced professionals typically recommend spending no more than 30 percent of your net income (that is, earnings after taxes) on discretionary items. It’s a good idea to create a monthly budget to ensure that you’re living within your means and not overspending. Doing so when the economy is strong could help set you up for success during bad economic times.
The Living Balance Sheet® can be a helpful way to put your entire financial picture together, including investments, insurance, and all your bills and expenses. Your financial professional can tell you all about it.
Consider creating and sticking to a budget now, before a recession (and possible loss of income) forces it upon you.
4. Invest in yourself
Pay for courses at a local college. Get an advanced degree. Rev up your networking engine by attending events. Unemployment is at record lows, but as we’ve seen, recessions have a way of changing all that.
One way to fund your continuing education is through whole life insurance. Rather than selling equities in a down market, you can borrow against a whole life policy’s cash value.2,3
5. Don’t panic
“Recession” is a scary word, especially for those of us who’ve lived through two back-to-back, “once-in-a-lifetime” recessions: the coronavirus pandemic and the Great Recession before it.
The most basic definition of a recession is a drop in output for two consecutive quarters. Simply put, the start of a recession is the point at which the economy is contracting, not growing.
Does that mean two bad quarters will upend everything you’re worked for? Of course not. Taking steps to prepare your wallet for a downturn when times are good can help take away some of the stress and worry surrounding recessions.
1 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.
2 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
3 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
The Living Balance Sheet® (LBS) and the LBS logo are service marks of The Guardian Life Insurance Company of America (Guardian), New York, NY. © Copyright 2005-2022 Guardian
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