12 Smart Money Moves to Make in a Recession

After a decade of strong economic growth, the U.S. officially entered a recession back in February, according to the National Bureau of Economic Research. Nobody knows how long this downturn will last, so it can be nerve-wracking to think about what this means for your finances. Fortunately, there are a few smart money moves that will help you make the most of this situation.

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It may seem counterintuitive to invest in the stock market during a recession, but right now is actually one of the best opportunities to invest. During a recession, stock prices are typically lower than average. That means you can get more bang for your buck when you invest, and you'll also see significant investment gains once the economy recovers and stock prices are booming again. If you wait until the economy recovers to start investing, you'll be buying stocks when prices are higher.

ALSO READ: Is It Safe to Invest During a Recession?

Asset allocation refers to how your investments are divvied up in your portfolio. When you're younger, you'll likely want to invest heavily in stocks because although riskier, they also have relatively high average rates of return. Then as you get older, your portfolio should gradually shift toward more conservative investments such as bonds. During a recession, it's a good time to double-check that your asset allocation fits your risk tolerance. If you're getting close to retirement age and suddenly realize you're investing too much in stocks, for example, now might be a good time to make some adjustments.

Creating an emergency fund is one of the best ways to strengthen your finances, and it's especially important during a recession. Millions of Americans have lost their jobs due to COVID-19, and depending on how long this recession lasts, you could potentially be out of work for a while if you're laid off. By building an emergency fund with enough savings to cover at least three to six months' worth of general living expenses, it will be a little easier to prepare for the unexpected.

Because saving more should be one of your top priorities right now, it's a good idea to comb through your budget to see if there are any areas where you can cut back. If you've been stuck at home over the last few months, you may find you've saved money in some areas such as transportation or dining out. But it's also easy to overspend in other areas, like online shopping. Map out all your expenses for the month and divide them into different categories, then set spending limits for each category. You may need to make some sacrifices, but boosting your savings is critical during a recession.

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If you already have a healthy stash of savings set aside for emergencies, focus on paying down debt. Categorize your various forms of debt based on the interest rate you're paying, then try to tackle the debt with the highest interest rate first. High-interest debt can be incredibly toxic to your finances, so the sooner you pay this debt off, the more money you'll save. And during a recession, freeing up cash is a smart move.

ALSO READ: 10 Creative Ways to Pay Down Debt

As important as it is to pay off current debt, it's equally important to make sure you're not taking on any more. It may be tempting to charge all your expenses to your credit card or take out loans if you're strapped for cash, but a recession is not the best time to be taking on debt. If money is tight, it may be tough to repay your loans or pay your credit card bills in full each month, which means you'll start to rack up interest charges. Before you know it, you could be in over your head and struggling just to make ends meet.

The coronavirus pandemic has wreaked havoc on our daily lives, forcing many people to adjust their plans. If you were preparing to make a major purchase -- like buying a new car or closing on a house -- consider whether right now is really the best time. If you have a well-stocked emergency fund, aren't saddled with any high-interest debt, and feel confident in your financial situation, you may still be able to go ahead with your purchase. But if you have more pressing financial priorities and this major purchase can wait a while, it might be a good idea to hold off on making any big decisions.

Those who are nearing retirement age should think about how this recession could affect their retirement goals. If you plan to retire within the next year or two, consider whether that's still feasible. You may need to think about pushing your retirement date back if your savings have taken a serious hit, or you might have to start preparing for an early retirement if you're worried you might lose your job. If you still have several years before you retire, think about whether your savings are on track and how much you still need to save to reach your retirement goals.

It never hurts to bring in some extra income, especially during a recession. Jobs may be scarce right now, but you may be able to find a side gig you can do from home. Consider jobs like freelance writing, editing, web development, or graphic design, for example. You might even be able to start your own business from home, especially if you're willing to get creative. If you love to teach, for instance, consider tutoring via video conference. Or try selling your old stuff through social media to make some extra cash. Even if you don't earn much from a side gig, every little bit can help grow your savings.

ALSO READ: 3 Mistakes to Avoid With a Side Hustle

To create a financial strategy, first make a list of all your financial goals -- such as building an emergency fund, saving for retirement, paying down debt, or saving for any major purchases. Next, rank them by importance to determine which ones are most urgent at the moment. Finally, consider how much extra cash you have each month to allocate to each goal. To hold yourself accountable, you may also choose to set up automatic transfers, such as diverting a set amount of money from your bank account to your savings account, for example. This way, you'll ensure you stay on track to reach your goals.

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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

One of the most concerning aspects of this recession is that nobody knows what the future has in store. If there's a second wave of COVID-19, there's a chance that another round of mass layoffs could be on the horizon. While it's uncertain whether that will actually happen, it's a good idea to have an emergency plan in place to be prepared. Make sure you have plenty of cash in your emergency fund, and be prepared to make budget cuts. It might also be wise to research how to apply for unemployment benefits just in case you lose your job. You'll likely need a few documents like pay stubs or a W-2 form to apply for unemployment, so having that information handy can help you file quickly and easily.

If you're having trouble paying your bills, reach out to your bank, lender, or credit card issuer to see if they can help. Many creditors are offering assistance to those experiencing financial hardship due to COVID-19, so you could save some money simply by asking for help. By taking advantage of these resources, you can keep your finances in good shape even during a recession.

These are unprecedented times, and it can be tough figuring out what to do with your money right now. The good news, though, is that by making these smart money moves, you can get through this recession and strengthen your finances at the same time.

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