Americans are facing tough economic times as the country is now officially in a recession. Although there's hope for a speedy recovery if the coronavirus wanes during warm summer weather or if effective treatments are developed soon, it's unclear if these things will happen or how long the economic malaise will last.
But you can recession-proof your finances if you make the right money moves. The American Institute of Certified Public Accountants recently surveyed CPA financial planners, who identified five steps to take to be ready for a recession.
1. Establish an emergency fund
Saving for emergencies is the number one recommendation of CPA financial planners, with 84% listing it among their top tips for preparing for an economic downturn. Having emergency cash means being prepared if your income drops in a recession, since you'll have money to cover the bills.
Ideally, you should have enough in a high-yield savings account to cover three to six months of living expenses. Since it can take longer to find a new job in a recession, having a hefty emergency savings account can ensure you're able to cover your costs if you're laid off and it takes awhile to find work.
2. Pay off high-interest debt
Debt can be a major financial burden, so it likely comes as no surprise that 53% of CPA financial planners in the survey identified debt repayment as one of their top three ways to prepare for economic trouble.
Paying off debt means one less obligation to worry about if your income is cut during a recession. You'll also be able to redirect the money that was going toward interest to saving or investing once your debt is gone.
3. Reflect on your lifestyle and priorities
Close to half of all CPA financial planners advise a careful review of your spending priorities as one of the top ways to prepare for a recession.
By reviewing where your money is going and what your financial priorities are, you can make sure you're using your money as wisely as possible. You can also find spending cuts so you have more to save for emergencies or use to pay down debt, enabling you to check off other items on this list.
4. Review your investment portfolio to make sure it matches your risk tolerance
Investing during a recession is often smart since there can be great buying opportunities during economic downturns. But it's important to recognize the risk of putting money into a volatile market. That's likely why 47% of the CPA planners recommend reviewing your investment portfolio among the top three steps to prepare for a recession.
One of the key components of this review involves making sure you have the right asset allocation for your age. If you're getting close to retirement and may need to start drawing from your investment accounts soon, you don't want to have too much money in stocks since you can't wait out any downturns.
5. Establish a crisis budget
Finally, close to a third of CPA financial planners suggested that creating a crisis budget is one of the three most important moves to be ready for economic trouble.
Cutting your budget in preparation for a crisis frees up money to save for a rainy day or pay down debt. Making a bare-bones budget also shows you what expenses absolutely have to be paid in case of a job loss or income cut so you'll have a clearer idea of how much you need in your emergency fund.
Have you taken these 5 steps?
If you haven't made any of these moves, now is the time to do so. The country is already in a recession, and it's not yet clear if there will be a fast recovery or if things will get worse if there's a second wave of COVID-19. You don't want to be caught unprepared, so shore up your finances to be in the safest position to weather the storm.