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Survive a Recession: Think Long TermSubmitted by Paul B. Miller, CFP on January 22nd, 2016
There are few things more nerve inducing to investors and the general public than a recession. Economic slowdowns occur from time to time, but a recession marks a sustained dip in economic performance. A recession is rarely good for your investment portfolio, but it does not have to be a bad thing either. With a few helpful tips pointing you in the right direction, it is possible to survive a recession.
Establish an Emergency Plan
The best emergency plan is liquid cash assets that are set aside and easily accessible. While it is always great to divert your discretionary funds from each paycheck into savings accounts and investments, you cannot always access that money without paying fines or taxes to withdraw them. You need to think ahead about potential emergencies and set aside cash you can grab with no questions asked. This allows you to stay afloat financially in case you lose your job during a recession.
In the midst of a recession this emergency fund should become a priority. Avoid making any big purchases, downsize your life (socially and physically), and redirect some of your investment funds to an emergency fund to protect against financial setbacks. Most importantly, do not accrue any new debt during a recession unless absolutely necessary. Remember to act conservatively in all financial decisions!
Protect Your Job
Downsizing and closures are a fact of life during a recession. A recession is a necessary, natural part of any economic cycle wherein the market corrects itself. As such, certain industries suffer severe downsizing or disappear altogether because they are no longer important to the wider economy as a whole.
In order to protect your job, there are a few steps you can take. First, start networking among your peers and higher-ups. Take on new projects that expose you to different tasks and challenge your current skill set. Speaking of your skills, there is no better time to add to your skills through certification courses and other educational opportunities. This makes you an invaluable asset to your company.
Build Alternative Income Streams
When the economy starts to hit rough waters, it is a good time to start building alternate streams of income. You can start by spreading your risks through well-diversified asset locations. Legal Zoom notes that municipal bonds are often a good option because they are conservative, but also produce reasonable amounts of return for your investment. It might also be a good idea to start looking at future trends so you can get back in the investing game while the market is low, and hopefully reap the rewards in doing so.
Last but not least, this is not the time to panic. What often makes a recession worse for all parties is emotional decision making. Avoid acting on your emotions and selling a stock or fund that is not performing well. Recessions often last just a few months, and those assets are bound to improve over the long run. You may come out behind if you sell while prices are low and that same stock rebounds in the years ahead. Be patient and take your lumps now rather than make rash decisions that could compromise your financial footing.
A recession is part of any economy. Like most things in life how you react to a recession has so much to do with how you will get through it. Never panic and make unnecessary moves in your financial life. Contact Paul Miller, CFP®, today for more helpful tips for recessions and many other financial areas for your life.