The first half of 2022 has been a volatile and turbulent time for the stock market. Many economists have been sounding the “R” word (recession). Several warning signs have started to appear this year: a yield curve that has inverted 3 separate times year to date (through the beginning of July 2022), a bear market for stocks, negative GDP growth in the first quarter and possibly, though not official yet, the second quarter (a recession is often defined as two consecutive quarters of negative growth), rising interest rates coupled with low unemployment. It’s important to remember that recessions are incredibly hard to predict. We might be a few months away or we might be years away from the next recession. However, it’s better to start planning for a recession now because it is not a matter of if a recession is going to happen, but rather when.
Dust off Your Resume
Even though your job might seem relatively stable now, you never know what could happen if the economy slows down. Now might be a good time to review your resume, update it as appropriate, and brainstorm answers to some common interview questions. You should also familiarize yourself with where to apply for unemployment insurance benefits if you needed to file a claim and what you may be entitled to if you were to lose your job. Another thing to think about is health insurance. If you have employer provided health insurance, know what your options might be in the event of a job loss. This may include: keeping your current insurance benefits through COBRA, buying insurance through the state or federal government exchange, buying it directly with an insurance company, or possibly joining a spouse’s plan. Make sure you have a game plan in place so you aren’t left scrambling for information and options.
Review and Cut Expenses
You probably think I sound like a broken record, but I can’t stress this enough. If you haven’t put together a realistic, working budget, then start putting together one now. It’s going to take at least a few months to fine tune, especially for variable expenses like entertainment and groceries. How much do you really spend in a month? Where does your money go? Are there expenses that you can cut back on? If you’re finding that every month you’re spending more than your income, you should start to work out a realistic budget on what changes you can make so that you are able to live within your means and possibly below your means if you needed to.
Beef Up Emergency Fund Savings
In order to better prepare for the next recession, try to start bulking up your emergency savings. You’ll be happy it’s available if something unfortunate happens like a job loss. A common question we get asked is: how much should I have in emergency savings? Unfortunately, there is not a one size fits all answer because it will depend on a variety of factors like the type of job you have, your age, if you have other income sources other than your primary employment, etc. At the very least try to have roughly three months of living expenses covered by emergency savings. Ideally, you should aim to have six months or longer covered by emergency savings, especially if you work at a job that would take time to replace.
Pay Down Debts
If you are carrying high interest debt or debts that have an interest rate that is variable, consider trying to pay down these debts faster than scheduled if you have stable employment. There are a couple of reasons for doing this: free up available credit and hopefully not be in a position of having to seek out more credit. Think about what your credit limit is on your credit cards. Are your current balances near that amount and are you making minimum payments each month? You should aim to pay down credit card balances as much as you can. That way, in the event you lose your job, or have an unforeseen expense that you can’t fully cover with your emergency fund savings, you at least have some available credit as a last resort to fall back on. This isn’t ideal, but at least it’s an available option. If your cards are maxed out, you may have to try and seek out new lines of credit. During recessionary periods, lenders can get more squeamish and conservative about lending and make requirements even stricter. You won’t be an ideal candidate to them if you already have a lot of debt and are seeking more.
Monitor Your Portfolio
The first half of 2022 has been a wake up call to many investors that markets do in fact go down. While we had a downturn in March of 2020, it was very brief and the markets recovered quickly and strongly. The first six months of 2022 so far have been pretty tough and drawn out in terms of volatility and downturn. If you hadn’t been proactively reviewing your portfolio coming into 2022, you may now be feeling that your portfolio was riskier than your previously thought or were comfortable with. It’s important to periodically review your goals and tolerance for risk. If you are a young person saving for retirement, then short term market volatility is probably less of a concern than someone who is nearing retirement and will be needing to soon draw from their portfolio to meet their everyday living expenses. Working with a financial professional can help you review your portfolio in comparison to your goals, tolerance for risk, and time horizon. A financial advisor can also be a moderating voice if you find that you make rash investment decisions when markets become volatile.
Recessions happen. Some are more severe and longer than others. There is no way to avoid them, but there are proactive steps you can take to be better personally prepared.
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC. LPL Financial and Croxall Capital Planning do not provide tax or legal advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.