Recession Proof - Managing Money During a Contraction
How to Prepare Your Finances for a Recession
Whether or not our economy is heading into a recession remains to be seen. By definition, we can’t know until we’ve been in one for six months and the National Bureau of Economic Research officially declares it.
But all signs are pointing to a recession on the immediate horizon. And the worst thing you can do for your financial wellbeing in the face of economic contraction is be caught unaware.
When there’s a hurricane gaining strength in the Gulf, people stockpile water and board up the windows. When there’s a tornado warning, people move to the basement. But when there’s an economic storm coming, what do you do?
In this post, we’re going to talk strategy — what are some things that you can do now to ensure that your finances and your portfolio weather an economic downturn.
What is a Recession?
Just a quick refresher for those who missed our last post. A recession is essentially a period of at least two quarters during which the economy significantly slows down. The GDP shrinks. Companies layoff employees they hired during expansion and the peak. Stocks drop. Inflation slows. Interest rates rise. (Learn more about reacting to rising rates).
Because recessions speak to the state of the entire economy, there is no corner left untouched. That means that everyone will feel its effects.
But all hope isn’t lost! Let’s talk about some things you can do to prepare.
Tips for Managing Money During a Recession
Check Your Emergency Fund
You should always have 3-6 months in liquid savings on hand to buffer against life's curveballs. If you don't, now is the time to start. With rising interest rates and increased layoffs, the more padding you have, the better.
Cash is King
During a recession, volatility spikes across asset classes, especially equities. Even bonds fluctuate. Cash can often be safer during turbulent times. Transitioning some assets to cash or currencies may help you mitigate losses and position you to invest in future opportunities.
Before you make any moves, however, be sure to consult your financial advisor.
Talk to a Financial Advisor
Recessions aren't the time to "set it and forget it." They’re when financial advisors truly earn their keep. Choose someone who actively manages portfolios during downturns — not just boom times. Here’s what to ask when hiring one.
Understand Your Cash Flow and Tighten Up
Budgeting is key. If you don't have one, free resources like Mint can help you get started. During a downturn, tighten your belt — cancel non-essentials, cut back on discretionary spending, and keep your financial base strong. If you're a business owner, managing small business cash flow is critical, too.
Delay Big Purchases
Big spending on homes, cars, and vacations can wait. Remember, during a recession, interest rates climb, making borrowing more expensive. Stay flexible, stay liquid.
Watch for Opportunities
Recessions also bring opportunities — depressed stock prices, real estate deals, and more. But two big rules: (1) Only invest if you have excess cash, and (2) consult a qualified financial advisor first. Timing and strategic action can make all the difference.
Is Your Money Recession-Proof?
Warren Buffet once said: "Be fearful when others are greedy and greedy when others are fearful." During a recession, it's important to protect yourself first. But once you’re secure, you may find the right opportunities to grow.
Are you financially prepared to weather a downturn? Need a second opinion on your investment strategy?
Schedule a no-obligation call with NEST Financial today. Gloria, Dan, and Sean bring nearly 30 years of experience managing finances through every economic season.
We serve individuals, families, entrepreneurs, and small businesses in Austin, Hill Country, and throughout Central Texas. Let’s prepare for the future — together.
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DISCLAIMER: We are legally obligated to remind you that the information and opinions shared in this article are for educational purposes only and are not financial planning or investment advice. For guidance about your unique goals, drop us a line at info@nestfinancial.net.