If You’re Saving More Money Due To Talks Of A Potential Recession, You Aren’t Alone

Put simply, Americans’ relationship with money is broken. It’s no secret that most Americans live paycheck to paycheck. That staggering statistic never ceases to sadden me. Unfortunately, widening income inequality is only worsening the problem.

Over the past decade’s bull market, the unemployment rate has steadily dropped as the market has reached record highs. But if you ask most American’s, you’d find that they haven’t seen their financial prospects mirror the recovery they see on TV or read about in the news. With only slightly over half of Americans investing in the stock market, it’s no wonder most aren’t jumping for joy when the market increases.

Headlines highlighting weak economic data are fueling fears of a recession. Knowing that many Americans already don’t feel financially secure, a potential recession would have devastating consequences. For that reason, now is the time to start making changes to prepare for a potential recession.

Metlife recently conducted a survey and found that 40% of respondents have started saving more money to support themselves due to talks of a potential recession. The fact that many are taking action is promising, but the fact is that the majority of respondents aren’t.

Now Is The Time To Take Action. Be Proactive.

The first thing you need to do is make sure you have a cash buffer. Well, not necessarily cash, but money set aside that you can quickly access in case of an emergency. I recommend using a high interest savings account.

This will be your emergency fund should you need it. Its main purpose is to make sure you can keep a roof over your head, food on the table, and have transportation to get to work. So how large should your emergency fund be? I typically recommend three to six months of basic living expenses. In tough economic times, you’ll want to save closer to the six month mark if you have no other access to capital.

If you, like most Americans, have trouble saving money, you’ll want to make and keep a monthly budget. A budget is simply a spending plan for your money. If you need help creating your budget, there are many free and inexpensive apps and services that you can use to help guide you. Try to save at least 15% of your after-tax take-home pay.

Continue To Invest For Retirement

Investing before you expect the market to drop may not seem like sound advice at first glance. But experts agree that consistently investing smaller sums is a better strategy than investing lump sums at once. This is because effectively timing the market based on expected market performance is nearly impossible to do consistently. In essence, you’ll want to spread your investments out over time to decrease the effect of timing.

A best practice is to try to automate your investing so that you take the human element out of it. You may already be doing this with automatic 401(k) contributions. Do the same with your other investments or savings, if possible.

Speaking of other investments, I recommend opening a Roth IRA if you don’t have one and qualify to make contributions. The reason that I love the Roth IRA compared to other types of IRAs, is that you can withdraw your contributions (not the gains) penalty-free. Due to the tax advantages of an IRA, you would only withdraw from your Roth IRA in a worst-case scenario, but it’s comforting to know it’s an option.

Focus On Repaying Your High Interest Debt

In the midst of a recessionary environment, the last thing you need is a massive credit card interest charge. Credit cards and personal loans often come with interest rates higher than 20% annually. With rates that high, it’s easy for your debt balances to grow and spiral out of control if you only make the minimum payment.

In order to accelerate your repayment of high interest debt you’ll want to focus on two things. Increasing your income and minimizing your expenses. From my experience, most people are too focused on pinching pennies, when they may have more potential to increase their earnings.

Asking for a raise or promotion in the face of a potential recession may not be optimal, so use judgement to determine whether it makes sense or not.

When it comes to cutting your expenses, focus on big recurring expenses. Housing comes to mind right away. If you can lower your rent or mortgage by getting a roommate, you can easily save thousands of dollars per year. The best part is that these savings will recur monthly without any extra effort.

The same goes for cutting your cable bill and switching to a lower-cost streaming service.

Regardless of whether you use the debt snowball to pay down your debt or not, it’s important to realize that a dollar paid today is one dollar less you’ll owe in the middle of a recession, and having that peace of mind is powerful.

Whether you think a recession is right around the corner or in a couple of years, the best day to start preparing was yesterday. The next best day is today.

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Camilo Maldonado is Co-Founder of The Finance Twins, a personal finance site showing you how to budgetinvestbank