TL;DR
- Regardless of how the economy is doing, it’s important to have a financial plan that timelines your financial goals and outlines monthly amounts you plan to save to meet those goals.
- During times of financial uncertainty, it’s important to remember your goals and (almost always) stay the course.
- Saving towards an emergency fund will help you weather unexpected crises and prevent you from getting into (more) credit card debt.
- Thinking critically about unnecessary expenses can help you find places to save money and put towards your savings goals.
- Raising your credit score is helpful in case you need to rely on credit in the future (and to save you money now on things like insurance and mortgages)
It seems like every other day there is a news article about whether or not we’ll enter a recession. For those of us who vividly remember the Great Recession, the idea of going through a recession can be anxiety-provoking to say the least (though let’s be honest, many of us prospective homebuyers would be pretty excited to see house prices tank, sorry, not sorry homeowners).
The seeming invincibility of the tech sector has been tarnished by layoffs at Amazon, Google, and Facebook (I know it’s Meta now, but if you wanted me to call it by a different name you should have picked one that’s less dumb Facebook). Earnings are growing more slowly than expected at big companies like Walmart (can you hear that teeny, tiny violin playing?). And while the stock market has generally been improving, keeping track of the latest trends can feel a little like being on a roller coaster.
It’s hard to read these articles and have any sense of what a recession would mean for us ordinary people. Yes, it turns up the heat a little bit on that mild sense of anxiety that has been perpetually bubbling since about 2016, but other than lighting a lavender-scented candle and deep breathing while watching reruns of the Office, it can be hard to know what to do to ease that anxiety. Luckily, there are steps many of us can take to be in a financial position to weather a recession and they mostly involve… not doing a whole lot… which is always great news.
Create a Savings Plan and Stick to It
The first thing you should do is actually one of the first things you should do with your finances no matter how good (or bad) the economy is: develop a financial plan. The book Stacked: Your Super Serious Guide to Modern Money Management by Joe Saul-Sehy and Emily Guy Birken does a really nice job of going over this. Basically, a financial plan involves thinking through your major financial goals, timelining them out, and then figuring out how much you need to save and where (stock market, bonds, high-yield savings accounts, etc.) to meet those goals.
My post Saving for the Short-, Medium-, and Long-Term goes into this in more depth. However, as an example, if you have a goal of retiring by 65 and you’re in your 30s, you ideally want to save about 15% of your income towards retirement and have most of that going into the stock market in order to reliably beat inflation over time.
If you have a shorter-term goal like buying a house in a couple of years, you should estimate how much you want to put down on a house (say $80,000), subtract what you have saved so far (we’ll pretend you’ve saved $20,000), divide the remaining amount by the months you have left until your goal ($60,000 / 24 months), and put that amount ($2,500) in a high-yield savings account or other safe, easily accessible location each month. Note that I didn’t factor in the interest you would earn, so you’d ideally have more than $60,000 over 2 years, but it can be good to estimate conservatively anyway since some months you might contribute less, interest rates will change, etc..
You’re probably wondering how we got to saving for a house from talking about a recession, but the point is that being clear on your goals and your saving strategy is hugely important for dealing with uncertainty when it inevitably arises. It’s easy to forget that you have 10, 20, 30, 40 years until retirement to ride out the stock market when you see it plummeting. Even if you’re close to or in the midst of retirement, you hopefully have many years (maybe even 30 or more!) to draw down those retirement savings.
It can feel Pollyanna-ish to assume that brighter days are ahead when each year feels like someone dropped yet another turd in the punch bowl, but there has never been a time when the stock market hasn’t recovered. Sure, the U.S. might collapse, capitalism could die, and we may all be the minions of an alien overlord in 10 years, but that’s a way riskier bet than the stock market, so I’ll bet on the stock market, which has a way better track record than, you know, alien invasions and may actually make me money.
Having goals and a saving plan can be the motivation you need to stay the course. Need some more motivation? The S&P500 has had a 20-year average annual return of 7.5%, but the average investor has only earned an average annual return of 2.9%. Why? A big part of the reason is that people try to time the market and/or freak out when the stock market falls, taking their money out and then missing the return growth of the stock market and having to pay a premium to re-invest.
So when things get scary, remember your plan, stay the course, automate your savings and investments so you’re not tempted to change things, and remember that by continuing to invest in a down market, you’re just buying things on sale. They’ll almost definitely go back up eventually. Isn’t it great when the best thing you can do is… nothing?
Create an Emergency Fund
The next step is to fund your emergency savings if you haven’t already. Ideally, you should have 3-6 months of expenditures saved in a safe, easily accessible location like a high-yield savings account. Keep in mind that’s not 3-6 months of income, it’s 3-6 months of expenditures to help cover a disaster like losing your job, having a health emergency, necessary car repairs, etc.
There is a lot of value in an emergency savings account. First, it is a huge stress relief to know there’s money there if you need it. Second, it keeps you from getting into credit card debt (or more credit card debt) if unexpected expenses arise. Yes, the money in your emergency savings account might not be earning a lot of interest, but if you take into account how much interest you would save by not using a credit card on a big expense, it can sure as heck be worth it.
If you don’t have an emergency savings account, it can feel a little overwhelming to get started. Nerdwallet recommends prioritizing saving $500 and then saving incrementally after that so that you’re not neglecting other important savings goals like retirement. However, paying down high-interest debt should come before saving for your emergency fund according to Nerdwallet (so order of operations goes: paying down high-interest debt > saving $500 to your emergency fund > dividing your savings between your goals like paying down lower-interest debt, your emergency fund, retirement, etc.).
Budget Your Expenses
Your next step is considering your expenses. If you are concerned about layoffs and/or need to save towards your emergency fund or other goals, you may want to assess whether there are areas you could cut back like unnecessary subscription services (there’s probably someone you could borrow an HBO Max login from), getting takeout lunch most days (I pack the worst lunches too, but it is so much cheaper), or buying those shoes that Instagram has been advertising to you that are so cute and tempting. For more tips on budgeting, see my post Creating a Budget That Saves Money and Makes You Happy.
Improve Your Credit Score
Last, but certainly not least, if your credit score is looking meh to dismal, you may want to look into ways of boosting it. If you face unexpected costs that are not covered by your emergency fund, you might have to rely on credit. Plus a good credit score can save you major dollars on things like car insurance, mortgages, etc.
In I Will Teach You To Be Rich, Ramit Sethi goes over some easy, accessible ways to boost your credit. The important thing to keep in mind is that your credit is mostly influenced by the length of your credit history, how much you owe, your payment history, and the types of credit you have. One way to increase your credit history length is to be named an authorized user of an account that’s pretty old (like one your parents might have—not a dig on your parents, just, you know, reality).
Your credit score is also influenced by your utilization rate—basically the percentage of your credit limit you’re using. So if you ask for and receive a higher credit limit, your utilization rate will go down (this doesn’t mean use more credit though, that would totally defeat the point!) This also means that it can help your score to pay down cards where you’re using a higher percentage of your credit.
There’s also the obvious: pay your debts on time and pay any collections accounts. For more tips and more advanced tips, see these great guides by Nerdwallet and Experian.
Take Home Points
For most of us, thinking about money is already pretty stressful and it can definitely be more so in times of financial (and political and social and health and…) uncertainty. But with a few easy and sometimes even fun steps, we can do a lot to help ensure we’re not totally sidelined when something bad happens. And I don’t need to tell you that something bad will happen eventually, hopefully it’ll be something small though and, with a little preparation, will just feel like an inconvenience.
And remember, I’m not a financial advisor, so make sure to consult with a professional before making any financial decisions.
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