Recession-Proof Your Finances: Be Mindful.

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There's no doubt: the economy has taken a hard hit recently, with it being revealed by economists that a recession in the United States actually began back in February, slightly ahead of the COVID-19 pandemic, and is likely already over. Though recessions and the factors associated with them often vary, there are always steps to take and knowledge to have to ensure your finances stay secure, when the economy is anything but.

Recessions are technically defined as two successive quarters of falling gross domestic product growth. Lisa Cargill, ChFC®, CLU®, CRPC®, CDFA®, Financial Advisor with Ameriprise Financial Services, says typical recession indicators include inflation, a rise in unemployment, a lagging GDP and consumer confidence.

"The economic challenges in the spring of 2020 were brought on by a very contagious virus that forced us to shut down a booming economy that was reaching new highs," said Cargill. "It's important to remember that markets ebb and flow over time and, even with the virus, it takes a combination of factors to cause a persistent long-term downturn. At that time, there were signs of economic weakness, but also some fundamental strengths too."

Unsurprisingly, there are great financial risks associated with a recession.

"When a recession hits, investors tend to be more cautious. People go out to eat less, shop less, postpone home improvements, et cetera—all the things that help keep an economy healthy.

"This lack of spending risks a spiral of effects. If spenders aren't spending, businesses may begin to fail and those employed may find themselves unemployed. Ultimately, this could lead to a greater chance of defaulting on loans and sometimes bankruptcy."

Cargill adds there are several steps you could take to feel more confident about your finances in the face of a recession.

Have healthy cash reserves. Cargill recommends having six to eight months of living expenses.

Avoid taking on any new debt, if possible.

Stay invested. "It's probable that you will experience volatility during a recession," said Cargill. "While it can be hard to watch your hard-earned savings take a tumble, try not to let emotions affect your decisions. If you pull out of the market when it's down, you'll lock in those losses, making it more difficult to recover."

Work with a financial professional. "If you're feeling nervous about your asset allocation or financial plan, meet with your financial advisor to talk through those difficult financial decisions," Cargill said. "Financial advisors work with you to create a sound plan that will help you achieve your financial goals—from saving for a new home to sending children through college to retirement, our goal is to help you achieve those dreams. When a recession or other economic hardship comes around, it can be trying to make those difficult decisions on your own. But a financial plan that you develop with your advisor should account for those unexpected obstacles, making you more confident in your financial life."

It's important to note your actions will vary, based on where you are in life and your career, and decisions are always made on a case-by-case basis.

"If you're young and new with your career, you may be just starting to build your financial independence and facing harder financial struggles like carrying student debt or building up your savings," said Cargill. "However, you also are further away from retirement—giving you more time to make up for market losses."

Those who are older, Cargill added, may have a home that's paid off, a healthy savings for emergencies and retirement, or grown children they no longer need to care for. They're also likely to have less time to build up retirement savings, should the markets take a tumble.

"Overall, it's important to look at your asset allocation, review your financial plan and talk with your financial advisor about what decisions make sense to help you achieve your goals," said Cargill, stressing that markets rise and fall over time and are notoriously unpredictable in the short term.

"Prior to the onset of COVID-19 and other tensions, we experienced the longest bull market in history. Investors should be mindful they have enough cash and liquidity available to manage their expenses and address upcoming goals, in order to be in a better position to weather a persistent downturn."

Written by Sarah Suydam, Staff Writer for West Michigan Woman.

This article originally appeared in the Aug/Sept 2020 issue of West Michigan Woman.


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