How to Recession Proof your Finances

02 SDM MAGAZINE SUMMER ISSUE

How to Recession Proof Your Finances

Recent signs that a recession is coming have had Americans panicking. President Donald Trump recently stated that a recession will only occur if voters fail to reelect him in 2020, but about one-third of economists agree that the dreaded “R” word is on the horizon no matter what and likely to arrive by the end of 2021.

Though no one can predict exactly when a recession will occur, one thing is true: Recessions are a cyclical component of the economy, and another is bound to happen at some point, whether one or 10 years into the future.

So what exactly is a recession and how can you protect your finances during the next one?

A recession is defined as a period of significant economic downturn that lasts longer than two consecutive quarters. Usually, economists look to the gross domestic product as the primary measure of economic health. However, the National Bureau of Economic Research ― the committee that officially declares and measures recessions ― says a negative GDP doesn’t necessarily have to occur to call a recession.

When it comes to shoring up your savings and investments against a recession, it’s important to understand that no one is 100% immune to its effects.

“Everyone is subject to risk,” said Justin M. Owen, a registered investment adviser representative and owner of Owen Financial Planning. “The best safeguard someone can have in place during a period of recession is a professional retirement plan that is goal-based.” That’s because a 25-year-old with an aggressive investment plan is going to ride out a recession much differently than a 60-year-old whose top goal is avoiding financial loss. “A retirement plan should take into account timelines, ages, risk tolerance and so much more,” Owen said.

“You should know what your portfolio is going to look like during a severe market downturn so that you fully understand what real risk looks like.”

The best safeguard someone can have in place during a period of recession is a professional retirement plan that is goal-based.

That said, there are a few steps you can take to minimize losses during a recession, no matter your age or financial goals.

1. Understand your cash flow. The first step in preparing for an economic downturn is knowing where you stand. An easy way to do this is calculating your cash flow, or how much money you have coming in versus going out.

“Uncertainty is a major cause of financial stress, so understand what your cash flow looks like in a typical month, and some of that uncertainty will be removed,” said Ian Bloom, a certified financial planner and owner of Open World Financial Life Planning. “If you lose your job or if the revenue slows down in your business, you may feel less constrained if you know how many months your savings will last you.” There are a number of free tools available to help you figure out this number, such as Mint. Simply link your accounts, and the free software will track all your transactions and categorize them.

“You will see patterns emerge, like more ‘fun money’ spending in summer months or around holidays, but you will also see the consistent ‘needs’ of the household and know what it costs to keep yourselves going when you need to be lean,” Bloom said. You can then set specific budget goals and look for ways to cut

costs or increase savings.Westcoast Leather

San Francisco