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As COVID-19 cases continue to rise and another wave of lockdowns sweeps the country, there's been more talk of the potential for the U.S. economy to experience another sharp downturn. These "double-dip recessions" -- in which the economy dips, recovers slightly, and then dips again -- are rare. However, even the recent S&P Global economic forecast states that a second dip is likely, especially if Congress fails to pass another stimulus bill.
Knowing that the economy could take another hit in the near future, here are a few important things you can do to prepare your finances and protect yourself against a double-dip recession.
1. Pay off high-interest debt
In almost any situation, paying off high-interest debt is one of the smartest financial moves you can make. Credit card debt is the most common (and expensive) culprit, but any debt with an interest rate of about 8% or higher should be prioritized.
It's particularly wise to double down on paying off debt if you expect economic uncertainty in your future. If you lose income or find yourself in a financially precarious position, the last thing you want is to have monthly debt payments and high interest fees hanging over your head. On top of that, lenders tend to tighten their purse strings during recessions. Should you need to get credit to cover a period of unemployment or finance a car, for example, it will be even more difficult to qualify for the best rates with large revolving debt balances. If you pay off your debt now, you should see an increase in your credit score.
To pay off debt quickly and save money on interest, focus first on the balances with the highest interest rates. If you need an early win to keep you motivated, try paying off your smallest balance first. You can also look into using a balance transfer credit card to pay off your debt interest-free, as long as you make sure to pay off your balance in full before the introductory period ends.
2. Minimize your fixed expenses
Aside from paying down high-interest debt, it's smart to minimize your fixed expenses across the board. You might be able to afford your lifestyle right now, but what if you lost half your income? Would you be able to adapt your budget quickly enough to avoid taking on more debt?
Of course, this is easier said than done. Getting your housing expenses down to less than one-third of your income is ideal, but if you already own a home, there's not a lot you can do to lower your mortgage payment. That being said, if you have good credit, a recession isn't a bad time to refinance your mortgage for a lower rate. You could also consider getting a roommate or, if you rent, moving to an area with a lower cost of living.
There are some other steps you can take to minimize your fixed expenses that don't involve uprooting your life. Avoid making big purchases, especially if they need to be financed. Instead of upgrading your car, keep driving what you've got, or opt for a used car you can afford to pay for with cash, if possible. Comb through your subscriptions and cancel anything you haven't used in the last month or two. Try negotiating some of your other bills, such as cable and internet, cellphone, and insurance, to see if the service providers will make a deal with you.
3. Give your emergency savings a boost
If you don't already have an emergency fund, it's time to start building one. And even if you do have one, you might want to consider padding it with some extra cash.
An emergency fund is a stash of money kept liquid, usually in a savings account, that can be used to cover emergencies and unexpected expenses. It's standard to keep about six months of basic living expenses in an emergency fund, although if you're just starting out, getting up to three months is a good initial goal.
On the other hand, if you already have six months' expenses saved up, it might be wise to push that to nine months or even a year during times of instability. Building up your cash reserves will help protect you against market losses and ensure you have enough to make ends meet if things go south. This doesn't mean you should cash out your investments -- staying invested is almost always the best response, even during a recession. If you can, you should be cutting your spending and boosting your savings rate to put extra cash away.
The thought of a prolonged recession, or another dip in the economy, is scary. But with a little preparation, you can put your finances in a good place to weather the storm.