Last week I posted about 6 Tips for Real Estate Investing in 2019. As we enter the 11th year of economic expansion in the US I’m going to discuss some steps you can take to prepare for a recession.
For the past 5 years, people have been anticipating an economic downturn. Yet the economic growth engine has kept chugging along. Looking at some economic indicators like unemployment, job growth, and wage growth, these indicators are still showing strong growth numbers. In other areas of the economy such as debt- corporate, auto, and student loans, these indicators show some more worrying signs.
With the stage being set, are we headed for a recession in 2019? I have no clue. What I do know is there are certain steps you can take to prepare for a recession just in case. Outlined below are 6 steps from J Scott who recently discussed on the Bigger Pockets podcast how you can prepare for a recession in 2019.
The 6 Steps to Prepare for a Recession
- Hoard Cash – In this economy with unemployment at its lowest levels in years and wages starting to pick up, it is important that you are saving a higher portion of your income. Curb superfluous expenses that don’t bring value to your life and be smart with your savings rate.
- Open Credit Lines – One of the best times to invest was the first few years following the Great Recession. The issue was if you didn’t have cash or access to credit in place it was nearly impossible to get. J Scott recommends requesting credit line increases on your credit cards (but don’t spend that extra credit!), secure a line of credit if you own a business, home, or perhaps even a personal line of credit. Make sure you aren’t having to pay exorbitant fees and only do so if it makes sense. When the recession comes and assets become undervalued you’ll be in a position to seize opportunities.
- Improve Your Credit Score – This should always be a focus. First, if you aren’t monitoring your credit score currently most banks, credit cards, and personal finance apps offer free credit monitoring. I personally use Credit Karma a free app on my phone that is updated about once a week. It shows you your credit score and offers suggestions on how to improve. It is amazing how quickly you can improve your credit score even if it is already really high! I’m in the 800s currently. The first step is to learn your credit score and start taking small steps to improve it throughout 2019.
- Determine Worst Case Scenario – Take a look at your finances and even your employment. If a recession kicked-in next month would you be able to handle it? What if your 401k or retirement accounts dropped by 40% and you lost your job, would you be able to pay your rent/mortgage? If the answer is no it is important you start divesting or preparing for a worst-case scenario. While it may be painful to think about it is much less painful to plan when it is a hypothetical then when you see on the news that the large investment bank you work at just went out business. *cough cough Lehman Brothers *
- Change Short Term Debt to Long Term Debt – If you have loans that have variable interest rates or an adjustable rate loan now is a good time to lock in a long-term rate. During the last crisis, a large number of mortgage loans were adjustable rate loans that started out with low monthly payments and then jumped after a year or two. Once the crash occurred and home values dropped people weren’t able to refinance those loans. This lead to a large number of short sales and foreclosures. Don’t let that happen to you! Be proactive!
- Don’t Chase Losses – This may be the hardest of the 6 to prepare for because it goes against our neurology as humans. People feel losses twice as hard as they do gains. Losing $100 in the stock market will hit you twice as hard as your excitement about making $100. When we start to enter a recession don’t keep putting money into a losing strategy. Cut your losses early if it is speculative. If you invested in say an S&P 500 index fund for the long-term don’t abandon your dollar cost averaging or long-term investment strategy. Try not to act emotionally and take a step back before making big changes to your investment strategy.
If you follow these 6 steps to prepare for the next recession you’ll be ready to weather and perhaps even profit from the next downturn.