The word “recession” induces a sense of dread that all your ready-made plans will instantly crumble. It’s easy to spiral into a ball of anxiety and fear when things seem uncertain. While a recession is a challenging time to navigate, they are also part of the normal business cycle.
That’s why having a financial strategy in place is key for navigating a possible economic downturn. Below, we’ll look at some common rookie mistakes when prepping for an ever-looming recession – how to avoid them and what you should do now in advance.
1. Liquidating Assets
While it seems logical to pull all of your money out of the market to hold onto as much cash as you can, it’s not necessarily the right move.
The biggest problem is that you have to be right twice so that this works: first, by selling while the market is relatively high, and then also identifying a point where you’ll re-enter the market again during economic recovery. Liquidating assets too soon also means you’ll miss out on potential gains when the market bounces back.
Instead, experts recommend avoiding making any rash decisions and really evaluating your overall portfolio to weigh your risk tolerance. Recessions can be stressful, and selling assets out of fear can lead to regret later on. That’s why it’s essential to maintain a disciplined and well-thought-out investment strategy.
2. Not Paying Down Debt
Spending money on other things other than debt is another rookie mistake when a recession is looming. Paying down debt holds more power than you might think because it can provide greater peace of mind and financial stability during turbulent times.
While it’s normal to feel defensive about how you spend your money — paying off debt will help you have more credit during tricky times. Not doing so means you won’t be able to open up new lines of credit or refinance your mortgage when you’re in a crunch.
3. Neglecting Emergency Savings
Having a general emergency fund is crucial, and more so during a looming recession. Experts agree that it’s important to have at least three to six months of expenses ready in cash to cover any emergency needs. Having that kind of safety net ensures you can pay for any big medical expenses or car repairs, and even prepare for a job loss. According to the Consumer Financial Protection Bureau, “Without savings, a financial shock — even minor — could set you back, and if it turns into debt, it can potentially have a lasting impact.”
4. Failing to Diversify Income
One of the biggest rookie mistakes is relying solely on one source of income for all your financial needs. While holding on to a full-time job can seem like the safest bet it can actually be risky when a recession hits.
That’s why it’s important to explore additional income streams, like freelancing, part-time work or a side gig to help you increase financial stability. Diversifying your income will take time and effort but can be a great way to build up your financial resilience and protect you during recessions and other economic challenges.
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