Don’t Fear a Recession If You Have These 6 Financial Traits
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Andrew Lisa
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Molly Sullivan
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Different economists use different criteria for defining a recession, but the outcome always spells bad news. Economic growth stalls, businesses slash production, employers lay off workers, the stock market loses value and anxious consumers tighten spending, which forces businesses to cut even more jobs.
Although downturns are a natural part of the business cycle, they leave pain and suffering in their wake — and there’s a widespread expectation that America is in for both at the end of this year or in early 2024.
The country has endured 14 recessions since the Great Depression, and those who emerge mostly unscathed tend to share a few of the following financial traits. If you don’t see them in yourself, don’t worry. There’s still time to adjust — but get into good habits now before the storm arrives.
You Don’t Carry Dangerous Debt
If a recession snatches your job or reduces your income, the presence or absence of toxic debt can mean the difference between enduring and imploding. If you have high-interest revolving debt, eliminating it is the first step to recession-proofing your financial life while there’s still time.
“This should be a top priority regardless of where we are in an economic cycle, but it’s very important in times of high inflation and potential economic downturns,” said Kendall Meade, CFP at SoFi. “One of the costliest pieces of our budget can be high-interest debt payments, so by lowering and eliminating these debts, we can free up cash flow in our budgets, allowing some breathing room. You should also keep in mind that credit card debt is only getting more expensive. As interest rates rise, as markets expect, expect your credit card debt to cost more.”
You Expect and Plan for Rainy Days
An emergency fund is the best defense against the kind of toxic debt that can sink you during a recession. Without a rainy day fund, you’ll turn to credit cards to deal with the dead battery or trip to the vet that’s always just around the corner.
“Aim to save three to six months’ worth of expenses,” Meade said. “This can help you get through tough times without having to rack up high-interest debt.”
Meade insists that your rainy day money should be easily accessible and protected by FDIC insurance.
“Many people are tempted to invest their emergency fund, but this can be a big mistake,” she said.
You Keep Track of Your Money Whether It’s a Little or a Lot
People who don’t spend and save according to a preplanned budget will never reach their full financial potential — and if the economy sours, it might be too late to start.
“By getting a handle on your budget while the economy is strong, you can get ahead and prepare for tougher economic times,” Meade said.
Leo Smigel, the founder of investing and trading site Analyzing Alpha, agrees.
“Being a good budgeter is crucial,” he said. “I’ve always believed in the 50/30/20 rule: 50% of income for necessities, 30% for wants, and 20% for savings and debt repayment. It’s helped me stay on track and prepare for unexpected economic downturns.”
You Live Below Your Means
Nothing screams financial mismanagement like spending more than you earn. From regular wage earners to billionaires, successful people live within their means — and your ability to survive a recession depends on discipline.
“Your bills should not max out your income,” said Paulique M. Duson Horton, a licensed financial services expert and author. “But should leave you a surplus every month or pay period for you to put in savings, investments or any other money-generating options such as a business.”
Her rule of thumb is that if your debt and expenses total no more than 65% of your income, then you’re on your way to becoming recession-proof.
You Have Multiple Income Streams
The pandemic proved that an extended crisis can quickly wash away even the healthiest emergency savings and that money coming in from more than one place is the strongest armor during difficult times.
“I would love to see everyone having at least seven income streams,” Duson Horton said. “But if you do not, please have more than just your nine-to-five job. We are living in a world where just having a regular job is not enough to hedge against a recession or create financial independence.”
You Keep Your Emotions Separate From Your Investments
Another pandemic-era lesson about enduring a recession came from the stock market. The fear and anxiety of early 2020 triggered widespread panic-selling that sent the Dow crashing by 37% between Feb. 12 and March 23, 2020.
Then, less than a month later in April, stocks started moving in the other direction in a stunning rebound, and by mid-August, the S&P 500 was up 27%.
Those who abandoned their long-term strategies to fear-based decision-making locked in huge losses when they sold near the bottom. But those who shelved their emotions and stayed the course weathered the storm, recouped their losses and piled on profits as the markets soared to new highs.
Recessions trigger stock market volatility that can rattle even the most stoic investors. Those who endure let their strategies — not their emotions — guide their decisions.
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