What this boils down to: Don’t be lulled into a false sense of security, financial advisors cautioned.
While a downturn isn’t inevitable, households can take financial steps to prepare in case one comes and triggers layoffs and more market volatility along the way.
“Think of a reasonable worst-case scenario — how would you fund it?” said Allan Roth, a certified financial planner and certified public accountant based in Colorado Springs, Colorado.
1. Shore up your cash reserves
Households should always ensure they have access to cash in case things go wrong, whether job loss, home repairs or unexpected medical bills, for example. But with recession might come greater likelihood of needing to draw from that financial buffer.
The general rule of thumb is to have three to six months’ worth of expenses handy. Sun advises clients to have six months, plus an extra three months for each child in a household.
Consumers should consider adjusting their emergency-fund needs based on overall stability, Roth said. For example, someone working at a start-up company generally has a less dependable job income stream than a tenured university professor and may therefore need more cash access, he said.
“Cash” also has a broader definition than parking money in a traditional bank account with paltry returns, advisors said. Consumers can look to high-yield online savings accounts or money market funds, for example, advisors said, which currently pay a higher return.
2. Reduce your debt burden
Paying down credit-card debt and other high-interest loans — and making sure households aren’t racking up more — is also of primary importance, experts said.
Something that lends further urgency to this advice: Variable rates are likely to increase more due to the Federal Reserve’s anticipated interest-rate hikes.
“There’s a potential for some folks to lose their jobs, and you’d hate to see in two or three months people don’t have any savings, have gone into debt, and it triggers a wave of personal bankruptcies or other forms of financial hardship,” Leer said.
Clients are showing more financial anxiety these days than they have in many years — but paradoxically, many households spend more to feel better, and that may be happening on credit cards, said Sun. Credit-card balances jumped 13% in Q2 — the largest year-over-year increase in more than 20 years, according to a recent report from the Federal Reserve Bank of New York.
Sun advises focusing on paying down debt with interest near or above the inflation rate, which is currently about 8% on an annual basis. The only potential deviation would be to first save money in a 401(k) plan up to the company match, if that’s available, she added.
Households might also try to reduce their debt burden by downsizing to one car instead of two to cut monthly auto payments, for example, Sun said.
Borrowers with a fixed-rate home or other loan at 3.5% are in a good position and don’t necessarily need to accelerate their debt payments, Leer said.
3. Stay the course on investments
Investors should also stick to their investment strategy — and not panic in the face of big stock and bond losses, Roth said.
Pulling money out and ditching a well-laid investment plan locks in losses, which right now exist only on paper. The S&P 500U.S. bonds, typically a ballast when stocks tank, are down about 16% in the past year.
“We’re like heat seeking missiles,” Roth said. “We buy high and sell low.”
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