If there's one word I had to choose to sum up the current economy and its outlook, it would be "uncertainty." Between seemingly conflicting indicators and economic pundits' ever-changing analyses, it's hard to know exactly what to think.
I do know one thing, though: When it comes to preparing for a recession, the rule of thumb should always be to hope for the best and be ready for the worst. Here are some of the best ways to do that as a parent.
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An emergency fund should be the first priority
I'm usually one of the first to shout from the mountaintop about how important investing is, but it's nowhere near as important as establishing an emergency fund. That should be your first financial priority.
Whether it's getting laid off, out-of-the-blue house repairs, terribly timed car issues, or whatever else, one thing's for sure: Life happens. And for whatever reason, it tends to happen when you least expect it. That's why it's essential to have an emergency fund.
There isn't a universal answer to how much you should have saved for an emergency fund, but a general guideline is to have at least six months' worth of expenses set aside. For example, if your expenses are $3,000 monthly, you should aim for at least $18,000 saved.
Not having an emergency fund can be expensive. You ideally want to avoid a situation where an emergency happens and you're forced to take out a loan (which comes with interest) or sell your investments (which can come with a tax bill). An emergency fund can give parents some leeway.
Get rid of expensive debt
Once you've established an emergency fund, you should look into getting rid of any expensive debt you have. For most people, this is credit card debt. Returns in the stock market aren't guaranteed, but you know what is? The interest you owe on any debt.
If a recession occurs, you don't want to navigate it while racking up more debt due to overbearing balances or interest. Recession or not, you can bet lenders will want their money regardless.
Eliminating debt also frees up cash that can be used to further secure your family's financial future. Money not spent on expensive debt is money that can be used to offset inflation or be invested and put toward things like your children's college education.
Even an amount like $100 monthly can work wonders over time in a 529 plan, which is a tax-advantaged account designed to help you save and invest for eligible educational expenses like college tuition.
Don't neglect your HSA if you have access to one
If you're enrolled in a high-deductible health plan, you're eligible to contribute to a health savings account (HSA), which is designed to help you save and invest pre-tax money to use for eligible medical, dental, and vision expenses.
It's a 2-for-1 benefit: You can lower your taxable income for the year, and the money in your HSA grows and compounds with tax-free withdrawals if used for eligible health expenses. HSAs can be beneficial for anyone, but especially parents.
Families might need to cut expenses during a recession, so having money in an HSA can help keep extra cash in their pockets. I'm sure as a parent, you're aware of just how often sicknesses and accidents can happen with kids. If you'll be inevitably spending on medical expenses, do yourself a favor and at least get a tax break along the way.
Look to invest in broad ETFs
If you're fortunate enough to be in a position to invest during a recession, you can lean on a broad exchange-traded fund (ETF), such as the Vanguard S&P 500 ETF (VOO 0.10%). This ETF mirrors the S&P 500, which tracks the 500 largest public U.S. companies and is the stock market's most popular (and important) index.
You can't be certain that individual companies will make it through a recession, but you can be certain that broad indexes like the S&P 500 will eventually recover. It might not be next week, next month, or even next year, but you can trust a rebound will happen.
Since its inception, the S&P 500 has survived and thrived through some of the worst economic crises this country has seen. Black Monday, the dot-com crash, the Great Recession, and the pandemic: The list goes on. You can guarantee this will continue to happen, and assuming it will is one of the safer assumptions you could make in the stock market.
Relying on broad ETFs during a recession can be a good way to keep you consistent with your investments while hedging some of the risks that come with individual companies.
