When you were saving for retirement, how did you account for changing economic cycles in your plan? In times of economic uncertainty, being financially prepared makes all the difference. A recession, with its potential for market volatility and reduced income, emphasizes the importance of prudent financial planning.

Here’s how you can prepare your finances for a recession.

First off, recession-proofing your finances starts with evaluating your emergency fund. Do you have one? And is it sufficient? The rule of thumb is to have at least three to six months’ worth of living expenses saved in an easily accessible account. This provides a safety net in the event of an emergency. If your emergency fund is currently lacking, consider reallocating your resources to build it back up.

Next, take a close look at your investment portfolio. Does your current asset allocation match your risk tolerance and capacity? In times of recessions, it’s essential to ensure that your investments are aligned with your long-term financial goals. Market volatility and future uncertainty feels uneasy to live through in the moment, but committing to your goals with a long-term perspective will help you persevere through a challenging market and economic period.

It is in times like these when working with a financial advisor will be most beneficial. Together, you can talk through your current situation, adjust your investment strategy (if needed), and create a recession-resistant financial plan tailored to your needs and goals. Discussing your plan with an expert can provide clarity and peace of mind during uncertain times. You should feel comfortable and confident to ask them any questions to have your concerns addressed.

Evaluate your various sources of income and how they may be impacted by a possible recession. For instance, money market funds or CDs (Certificates of Deposit) may offer a higher return than keeping cash in the bank. However, they may also have liquidity constraints or penalties for early withdrawals. Assess the trade-offs and ensure you have a mix of liquid and less liquid assets to cover your immediate needs.

With increased interest rates during a recession, it’s crucial to determine the best plan to tackle your debt obligations. Prioritize high-interest debts such as credit card balances. If possible, consider consolidating or refinancing loans to secure lower interest rates. Reducing your debt burden can free up more of your income for savings or investments.

Overall, in times of economic downturn, it can be tempting to pivot to cash or tap into your investment portfolio to cover immediate expenses. However, limit taking funds out of a portfolio in a down year as it can have long-term consequences. It locks in losses, potentially hindering your portfolio’s ability to recover when the market rebounds – which if we learn from history, it always does. Instead, rely on your emergency fund and other sources of income to cover short-term needs.

Preparing your finances for a recession is a productive step towards financial stability and security. Start by ensuring your emergency fund is adequate and your investment portfolio aligns with your risk tolerance. Examine your income sources, strategize debt management, and resist the urge to dip into your investments prematurely. By taking these steps with your advisor, you can navigate economic challenges with confidence and resilience.

Please consult with an attorney or a tax or financial advisor regarding your specific legal, tax, estate planning, or financial situation. The information in this article is not intended as legal or tax advice.