Monday was another brutal day on Wall Street, with the Dow Jones Industrial Average tanking by 13%, its second-worst single-day drop in history, and the S&P 500 falling by 12%, its biggest one-day plunge since October 1987. Meanwhile, COVID-19 continues to throttle American life as we know it. Schools have closed nationwide, leaving countless working parents scrambling. And small businesses across the country are already beginning to struggle as their customers stay away in droves. Some are being forced to shut down -- either due to government mandate, appropriate caution, or lack of clientele. It's all leaving business owners wondering how they'll pay vendors or make rent, and leaving those who work for them wondering when they'll see their next paychecks.
These conditions provide all the ingredients to launch the U.S. into a full-blown recession, and on Monday, President Trump acknowledged that as a possibility. He also stated that we could be dealing with this COVID-19 outbreak until July or August, which could leave the U.S. economy reeling.
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Clearly, that's not the news any of us want to hear. Recessions are scary, leading to widespread job losses and driving businesses small and large into bankruptcy. And while it's too soon to tell whether we'll actually have a COVID-19-related recession on our hands, one thing's for sure: If your finances aren't in shape for that eventuality, this would be a good time to start getting prepared.
Hope for the best, prepare for the worst
If American life is effectively stalled for months as the world grapples with the COVID-19 pandemic, the repercussions could be significant and not at all short-lived. But rather than focus on all the things that are beyond your control, think about the things you can do to protect yourself if a severe economic downturn strikes.
First, make sure you have a solid emergency fund. Under normal circumstances, it's smart to have three to six months of living expenses tucked away in a savings account. Given the situation we're facing today, you'd be wise to lean toward the higher end of that range, so don't start raiding your cash reserves for any big splurges, and start adding more to them however you can.
Some might even want to go a bit beyond by trying to sock away the equivalent of nine months' worth of essential bills. This is an especially smart strategy if you own a small business or are employed by one. So if your cash cushion is shy of that, now is the time to pare back your expenses where you can.
Hopefully, if you have an investment portfolio, it was reasonably diversified -- but even if it was, you've still taken a bath. Most stocks got hammered over the past month, and we've officially entered bear market territory. Recovery times from a bear can vary widely, but it is reasonable to expect it will take half a year or more for stocks to begin to regain value. Now may not be the best time to start making big changes to your asset allocation -- selling off those pummeled stocks and fleeing to "low-risk" investments only guarantees you won't be holding the stocks when (or if) they eventually recoup some or all of their value.
Finally, it could pay to line up some sort of side job -- ideally, one you can do from home, or with minimal direct interpersonal contact. (To be fair, for many people, that's not going to be an option, but if you have a skill you can monetize from afar, you're in better shape in this regard.) Unfortunately, even the most stable of jobs can become vulnerable when widespread economic turmoil sets in -- and many popular part-time jobs may stop being as viable. However, given that many schools are shut down, countless parents will be desperate for home-schooling help, so if you have any experience in that arena, you can see about tutoring remotely. And with delivery services overwhelmed with demand, there could be openings in that arena as well.
We're living in uncertain times right now, and fears of a looming recession only add to the stress. But rather than focus on factors you can't control, do what you can to prepare. The knowledge that you're reasonably ready for what may lie ahead can buy you some much-needed peace of mind in an otherwise upside-down world.
