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Three Ways to Protect Yourself Against a Recession

Three Ways to Protect Yourself Against a Recession

January 16, 2020

We’ve been hearing conflicting reports about whether a recession is looming.  A recent survey of 500 Americans shows many are worried about a recession and plan to adjust. If you’re in that category—or even if you’re not—now is a good time to take action to protect yourself in case of a recession.

Almost four in ten of the respondents to the survey (37 percent) say they are not financially prepared for a recession. Another 22 percent say they are not sure. And based on the survey, they are probably right. Thirty-two percent of respondents reported having no money in an emergency fund and 55 percent of respondents reported having $1,000 or less. The median amount was $712.

Impact of Recession: Economic Contraction and Unemployment

The most tangible result of a recession is increased unemployment. The economic contraction reduces profits for companies. The companies cut jobs. Unemployed people don’t spend as much. Companies serving workers cut jobs. More people are unemployed, and the cycle continues.

In fact, the survey found that nearly four in ten of the respondents (42 percent) planned to reduce spending and increase savings in anticipation of the coming recession.

Here are three ways you can protect yourself in case of a recession:

  • Feed your emergency fund. Since most American don’t have enough in the emergency fund, start there. Most experts agree that three to six months of essential bills is the target for an emergency fund. Cash in savings at the bank, a home equity line of credit and credit cards with untapped credit limits can all be part of your emergency fund.
  • Anticipate your needs. If you count on income from investments to pay your monthly bills, think about your income needs in the coming months. If you need $1,500 each month from your investments, that’s $18,000 each year. I often recommend that clients keep one year’s worth of spending in cash, spending for years two and three in short-term bond funds and spending needs for years four and onward can be in a diversified basket of stocks.

    With a recession coming, clients can keep some extra cash and add another year’s spending to the short-term bond fund. The added cash allows more time for any recession to run its course before it’s necessary to sell any stocks.

  • Adjust investment allocations. More than a third of the survey respondents didn’t know if they should adjust their investment allocations because of the recession risk. This is a great area to seek some professional advice. Your investment accounts are intended to provide for your needs. Allocations should be based on your goals. But it’s hard to be confident of your allocation when you are worried about a recession.

    As you think about what you should do about the coming recession, I recommend that you consult an experienced, well-trained, professional financial planner. A great place to start looking is here. This link will identify a few local CERTIFIED FINANCIAL PLANNER™ professionals. Talk to a few of them to see who is the best fit for your family.

As you visit with financial planners, I suggest a couple things to check:

  • Is the advisor always the client’s advocate – a fiduciary advisor?
  • Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.

These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.

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A fiduciary, fee-only, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.

Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.

If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.