Published June 5, 2018|4 min read
Update Aug. 15, 2019: You might have heard a lot about something called the "inverted yield curve" over the past few days. Its meaning is wonky and complicated, but it's often a signal that an economic downturn is on the way. Regardless of the timeline, the advice below can still help you get your finances ready.
The U.S. economy has been growing for nearly a decade since the Great Recession. It may not feel like it for everyone, but the country is in the midst of one of the longest booms in history. All things must pass, however.
A panel of economists recently predicted the boom will end by 2020 and the country will plunge back into recession. The National Association for Business Economists surveyed 45 forecasters for their takes on the economic outlook. Half of the panelists say the next recession will occur by the second quarter of 2020, while another third expect the downturn after 2020.
New survey aside, at some point, the good times will come to an end. Because they always do.
Most of us understand a recession to generally mean any bad time for the economy, but it's a technical term. A recession is when the gross domestic product — the combined economic output of a country — shrinks for two straight quarters. The GDP has had a couple of hiccups since the recession, but has avoided a sustained drop for almost a decade.
A recession is a big deal. It means the entire economy has been shrinking for months. It means companies are making less money, which means people are making less money. It can hurt your investments and cost you your job.
It can be scary, but our advantage is we know it's coming, sooner or later. So what should you do?
If you don't have a budget, make one. Get an idea of which expenses are necessities and which are luxuries — things like entertainment and vacations. Identify where you can cut back in case of emergency.
"It's important going into a recession that people know what might happen," said Leon LaBrecque, CEO of LJPR Financial Advisors in Michigan.
You may want to start cutting back on expenses and debt now. Prices will likely go down in a recession, so consider holding off on big purchases until then, LaBrecque said.
It's basic personal finance: Have three to six months of expenses saved up. Even if you already have a lot of savings, make sure you can access at least part of it right away. You don't have to pull all your money out of investments, but make sure you have some cash in savings accounts.
For especially nervous investors, LaBrecque recommends certificates of deposit. They earn a small amount of interest and can't be accessed until they reach their maturity date, but are insured by the Federal Deposit Insurance Corp. for up to $250,000, so they're a super-safe place to stash money — but not all your money.
"I'm not by any means suggesting that we run through the streets away from our equities," LaBrecque said.
The old personal finance adage applies: It's not about timing the market, it's about time in the market. If you're still far from retirement, there's no need to sell all your stocks in a panic. Recessions happen and the market has always come back stronger. But there's also no harm in setting aside some of your cash just in case.
You may already be a great worker. But the job market will get even more competitive in a recession, when budgets are tighter.
"Now is the time to learn the skills you will need in 2020," LaBrecque said. "If you wait until the recession hits, you'll be in the same leaky boat as everyone else. Sharpen your saw while everyone else is partying."
LaBrecque has been through plenty of recessions. They come with risks, but also rewards, he said. Real estate will be cheaper, as will stocks, and business opportunities may present themselves unexpectedly. It's like Petyr Baelish, aka Littlefinger, always says:
If you have a term life insurance policy, a recession shouldn't have any effect. The rate is locked in. (If you don't have a policy, we can help you compare life insurance quotes here.)
However, the cash value of universal and whole policies may lose value if the economy dips. If you're considering buying one of these policies, look carefully at the performance projections your broker presents, because they may change in a recession, said Tyler End, a certified financial planner and general manager of disability product for Policygenius.
"They're illustrations," he said, "not guarantees."
Want to see how your state has done since the last recession? Here's how wages have grown in every state since the last downturn.
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