One look at how the global stock markets have performed the past few weeks and it’s no surprise that people are starting to talk about the R-word….Recession.
If you’re a millennial, you may have just finished your undergraduate degree during the 2008 recession and struggled to find a job. (That offer letter you got in the fall was pretty much worthless come spring.) Or maybe you had been working for a few years only to see your 401(k) dwindle. Several years have passed since the last recession and you’ve got a stable job now, but you’re scared of what could happen if another recession were to strike.
Whether or not the U.S. is headed into a recession, it’s best to be as financially prepared as possible. Here are ways to start preparing now.
Rainy Day Fund x 3
In 2015, 62% of Americans had less than $1,000 in savings. Among older millennials (25-34 years old), 44% had ZERO in savings. Sure, you’re getting by paycheck-by-paycheck, but if there’s one major expense like medical or car repair bills, or you lose your job, then what? Rack up more in credit card bills or ask friends and family for money?
Saving $1,000 (and not spending it for “emergencies” like shopping or a vacation) should be your #1 priority. Better yet, stick the savings in an account separate from your regular checking account so you’re not tempted to touch it.
After you’ve saved $1,000, bump your goal up to 3 months of expenses. Don’t know what your monthly expenses are? Make a budget. While you could be working for a profitable and seemingly stable company right now, you never know what could happen. In the unfortunate event you end up having to find a new job, these funds can help hold you over and temporarily relieve some of your money stress.
Paying Down Debt
According to a recent study by Facebook IQ, 46% of millennials say that financial success means being debt free. This compares to the 13% saying being able to retire is the indicator.
During the last recession, I knew a lot of people who couldn’t find a job, didn’t know what to do, and by default, decided to go to graduate school. It’s played out great for their careers, but now they’re carrying tens of thousands in debt. Millennials are by far the most educated generation; however, a byproduct of this is that they now are carrying the highest load of school loans in history.
While things are still rosy, the best thing to do is to aggressively pay down debt – school loans, credit cards, car loans, or a mortgage (assuming you’ve finished saving for your rainy day fund). It’ll be one less thing to worry about if a recession hits. Start with the highest interest-bearing loans first if you want to save the most interest. Start with the smallest loan first if emotional satisfaction is your thing.
If you own investments, you might be tempted to sell everything in a downturn and go to cash. (I know I feel it!) Instead, take the time to understand the composition of your portfolio and see if it’s still diversified enough. Rebalance as necessary. (Have no idea what this means? Talk to a financial planner or advisor.) Bought a few individual stocks that have been high flying the past few years? Depending on your risk tolerance, it might be time to exit those positions and re-invest those proceeds into more diversified strategies such as low-cost index funds that give you exposure to a variety of sectors and different sized companies.
If you’ve got some extra cash to spare, consider diversifying your assets further into real estate or rental properties. Now, don’t go buy a property immediately. Be opportunistic. Do your research and understand the market, ask questions, and exercise patience. Unfortunately, not everyone will have all the resources to make it out of a recession (if it happens). Baby boomers without enough retirement savings may be forced to sell their largest asset—their home—in order to generate cash flow.
Many/most things in life are out of your control. But the one thing you do control is how you manage your money. Reevaluate what you’re doing now so that you can be better prepared to weather any rainy days ahead.