Financially Preparing for a Recession
March 01, 2023Recession and inflationary times offer opportunities, and those who prepare can take advantage of them. These opportunities can include higher interest rates on savings accounts and lower prices for market index funds.
This guide will help you prepare both for an economic recession and show you how to combat inflation with your retirement savings plan.
Cash Is King: Top Off Your Emergency Fund
Your emergency fund can give you peace of mind in tough economic times and recession. Ideally, your emergency fund should have the following characteristics:
Liquidity: How easily can you access your money?
Strong Interest Rate: Does this savings vehicle offer competitive returns?
Sufficient Size: Do you have enough money saved to weather difficult situations?
FDIC Coverage: Does the FDIC insure your deposit?
Some people may also use other types of assets in their emergency funds, such as money market accounts and CDs.
A high-yield savings account (HYSA) with a reputable bank can provide easy access to your money in an emergency while maintaining a strong interest rate.
Clean Up Your Credit Profile
In an emergency, having access to affordable credit can be the difference between a difficult situation and a dire financial problem.
The three major credit bureaus, Equifax, Experian, and TransUnion, operate the website AnnualCreditReport.com. This website can help you check your credit history for free.
Other free credit monitoring tools exist. These tools can also provide you with an estimated credit score.
Increase Your Retirement Savings Rate
Inflation erodes the purchasing power of your dollars. If your salary does not increase proportionately to the reported inflation rate, increasing your savings rate can help to defray the effects of inflation on your portfolio.
You may also consider investing in asset classes with higher returns, such as equities if your investment timeline permits riskier assets.
Employ Dollar-Cost Averaging
Rather than investing large sums of money at one point during the year, you can use a “dollar cost averaging” (DCA) strategy.
DCA requires you to make fixed purchases of your chosen retirement asset periodically. In other words, you might choose to invest $500 per month.
You make this investment regardless of market conditions. This allows you to avoid the fluctuations in price associated with your particular asset class.
This approach can help you stay the course during turbulent economic times and avoid making hasty investment decisions.
Take Advantage of Your Company’s Retirement Benefits
Your company may offer retirement benefits as part of your compensation package. Make sure you take advantage of these options if available:
401(k) Match: Your company may offer matching contributions to your 401(k) plan.
HSA Contributions: If you qualify for a health savings account (HSA), then contributing to it can function as a backdoor way to save more for retirement.
Cash Bonuses and Equity Grants: If you receive an end-of-year cash bonus or periodic equity grants, consider using these income sources to secure your financial situation before a recession.