Personal Financial Planning Tips for a Recession From CFP and Author

Personal Financial Planning Tips for a Recession From CFP and Author

  • Some financial analysts predict that there will be a recession within the next 12 months.
  • A recession, along with inflation and rising interest rates, could really impact Americans’ wallets.
  • The time to make your finances more resilient is before the economic downturn starts.

With inflation at a 40-year high and interest rates rising rapidly, consumers could be facing a recession. The Conference Board puts the probability of a US recession within the next 12 months at 96%.

Consumers are already dealing with higher grocery and utility bills. A recession typically brings with it job uncertainty, stricter lending policies by financial institutions, and slower growth in investments. All of this leads to a possible recession putting consumers’ financial security at risk.

Preparation for any unpleasant recession-induced consequence should start long before an economic downturn starts — and it’s not too late, according to Jamie Hopkins, a Certified Financial Planner and personal finance and retirement expert. He believes that there are tangible steps that investors and consumers can take to protect their financial goals. In “Find Your Freedom,” an upcoming book he co authored, Hopkins advises that working with a financial planner will allow you to live your best life by design and not by default. His goal with this book is to help people retire better and find the freedom in using their money well.

He shared with Insider his top strategies for protecting your finances before and during a financial downturn.

Get smarter with your cash

Many people who see a recession on the horizon might immediately start to sell off investments and want to keep their cash in an ordinary savings account; Hopkins cautions against this.

“Parking your cash in the bank is not the best thing to do. If you can be strategic and smart during recessions, this can be a good time to invest,” Hopkins said.

He added: “Look into cash equivalents like an ETF. If you are looking for a place to store cash, there are market funds and REITs. Having too much cash in the bank during this time can result in missed investment growth opportunities.”

Put off expensive purchases for a while

Experts typically advise against spending more than 30% of your net income on discretionary purchases. With high inflation and increasing interest rates, it would be best to put off large expenditures that are not necessary.

“If you can delay buying a home, expensive vacations, etc., it’s reasonable to do that,” Hopkins said. “Since we are headed into an uncertain time economically, it’s best to keep discretionary purchases at a minimum until we are on solid footing again.”

How are you servicing your debt?

In troubling economic periods, the first thought may be to try to pay off all debt but having access to that money for emergencies or opportunities to invest may be a better use of those funds.

“There is a difference between negative high-interest credit card debt and a mortgage or a low-interest rate line of credit for emergencies,” says Hopkins. “Being in a position where you can respond effectively to emergencies or even a job loss makes you better prepared for an economic downturn.”

Stay the course with your investment portfolio

If you are close to retirement, consider having any withdrawals that you would make initially on hand in cash.

“If you plan to have, for example, the first 2 years of your retirement withdrawals in cash and ready, you will not be worried right now about what the market is doing and how inflation and interest rates will impact your portfolio,” Hopkins said .

It’s also important not to make snap decisions with your portfolio. “Think about where you are right now and don’t do anything to jeopardize that based on short-term economic events. The span of retirement is typically 20 years, a recession will most likely last a year,” Hopkins said.

Prepare your finances before the economic downturn begins

Taking steps to prepare for the economic downturn before it happens will take away the stress and panic that can arise when experiencing a recession.

“I cannot stress this enough: don’t wait until the last minute and don’t panic, you will almost always make a bad financial decision when it’s based in stress and panic,” Hopkins said. “If you are feeling nervous about your financial picture heading into a recession, think about what steps you can take to strengthen your financial position.

“It’s during times like these that having a financial plan is key, if you have a good financial and investment strategy, you will be in a strong financial position for whatever downturn comes.”

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