Here are the 4 steps you can follow so that your investments and savings can weather any financial storm.
1. Start tracking your cash flow.
Calculate your cash flow by how much money you have coming in versus going out. Knowing what your fixed and variable costs are each month as well as where your income is coming from will relieve some of the uncertainty. If you’re employed, there’s a high chance that you might get laid off during a recession, so you’ll want to know exactly how long your savings will last. Know where your money is going and start setting budget goals. Identify expenses that can easily be cut in the future.
2. Top up your emergency fund.
Best defence against economic hardship will be a well-funded emergency fund. Rather than getting into high-interest debt, you can use your savings to cover basic living expenses. As a general rule: create an emergency fund of at least 6 months worth of expenses.
The reason why an emergency fund is critical is because you’ll need liquid money to keep paying your bills. If you or your spouse lose your job, an emergency fund will come in handy to keep you afloat.
3. Pay off outstanding debt.
With talk of an economic crisis appearing soon, it’s a good time to start aggressively paying down any bad debts you owe, especially high-interest credit card loans. You’ll want your income going toward monthly living expenses and not paying off debts. Plus, if you miss too many payments you could end up lowering your credit score, which could make your life more challenging in the future.
4. Rebalance your investment portfolio.
Once you’ve taken care of your emergency fund and paid down any outstanding debts, it’s time to review your investment portfolio. Mitigate as much risk as possible but still maintain enough growth in your portfolio to pay for living expenses and outpace inflation. Look to diversify your portfolio to include a wide range of asset classes, like foreign stocks and bonds, this will put you in a better position to endure a downturn.
Recessions are a normal part of the economy. They are coming and going. They’re cyclical in nature and notoriously hard to predict. Control what you can and prepare yourself as best as you can!
Sven Franssen