If you want to prepare for the next recession, you will need to take steps now to ensure that you are ready to protect what you already have and build a nest egg for the future. As of the time of this writing in September of 2019 the financial and real estate markets have seen a record run up since the last recession in 2008. Financial markets go in cycles and typically after a bull run up, the markets retrace into a recession for a period of time before trending back up again. Since the market has been on an up trend for over a decade it is likely that a recession is coming soon with many experts predicting that a market recession or crash could come to fruition in the year 2020.
While this upcoming recession may not be an immediate crash, it could be a long drawn out downtrend as we are starting to see signs of the start of a recession in 2019. You should prepare for the next market crash by utilizing offensive and defensive strategies to set yourself up for success and financial security in the future. I discussed the topic of how to prepare for the next recession on 1150AM KKNW radio and you can listen to the audio here:
What are Defensive Strategies to Prepare for the Next Recession?
Defensive financial strategies to prepare the the next recession are tactics you can use to make sure you can maintain your status quo in a recessionary period. These defensive strategies include (1) paying or eliminating high interest debts, (2) Having a 3-6 month emergency fund and (3) not panic selling the market.
(1) Pay off or Eliminate High interest Debts
If you have the funds to do so, now is the time to pay debts down as low as you can to set yourself up for success when the next recession hits. In generally paying your debt limits below 25% of your available credit limits will put you in a position to get the best interest rates for borrowing credit. If you don’t have funds available to pay down your debts, that is ok as there are other options available to you.
Bankruptcy can eliminate your debts and allow for you to prepare for the next recession. A chapter 7 bankruptcy discharges most types of debts if you can qualify, while allowing most people to maintain all of their assets. If you own a home with more than 125,000 in equity or own other major assets or are a high income earner, chapter 7 bankruptcy may not make sense. That is ok as you could still consider chapter 13 bankruptcy, which allows for payments on debts over 3-5 years to become debt free while maintaining all assets in most cases. Some consumers in chapter 13 have to pay back all of their debts, while others only have to pay back some of their debts. This depends on a household income, assets, family size and types of debts among other factors.
If bankruptcy is not an option for one reason or another a consumer can consider their debt settlement options where they may be able to pay less than the full balance of their debts. This usually works best if a person is already delinquent on the debts, but now has the ability to pay off the debts in a settlement amount for a lump sum. Rarely does it make sense to go on a payment plan with the numerous debt settlement companies as these companies charge a significant fee, cause accounts to go delinquent if they are not already delinquent and can do significant damage to a consumers credit report. There are also tax implications in which a consumer may have to pay taxes on any debt forgiven over $600. This is not the case in bankruptcy.
(2) Have 3-6 months in Savings for an Emergency Fund
If you get laid off in a recession or you are self employed and you don’t have disposable income to pay expenses, you will want to be sure to have an emergency fund available so live on. You should consult with an attorney if thinking about bankruptcy as they can advise how much funds you can have on hand for retirement or savings. Failure to have an emergency fund available with no source of income coming in is not going to help you. You should know that funds in a retirement account are likely exempt (protected) in a bankruptcy filing, so before draining your retirement funds to settle debts, you should consult with a bankruptcy attorney.
(3) Don’t Panic Sell The Market
If you are invested in retirement accounts already such as an IRA or 401K, it likely will not make sense to panic sell when the market starts to crash. If you are holding securities for retirement in the long term, it is likely you will miss out on gains if you sell at the bottom of the market and don’t get back in to the market to realize the gains from a recovering market. It is very hard to time the market so often times it makes sense to just hold and wait for the recovery or you could miss out on possible gains after the market start to recover.
Also if you were to sell off parts of your retirement accounts, you will need to consider that you may have tax consequences and penalties for doing so. Therefore selling off parts of your retirement accounts premature is not advisable in most cases and you should just hold the accounts, collect your dividends and wait until the market recovers.
What are Offensive Strategies to Prepare for the Next Recession?
(1) Build a War Chest and Save Cash
Once the market is in a recession it will allow great opportunities for investing in the market to buy at the bottom and realize gains in the long term. You should be saving for when this time comes so you can realize the gains at a greater rate when the market recovers. This is the best time to purchase real estate as well as a primary home or investment property as interest rates and purchase prices will likely be at a low point until the market recovers. Once the market recovers you will be in a prime position to profit on the gains.
In the meantime while building your war chest, you should keep money in a high interest online savings account. At the moment some of these accounts allow for 2% returns or higher on your money, making these accounts insulated from a market crash and allowing for a modest return in the meantime while you wait to make your next move in investing when the time is right to invest the funds. If you put your excess funds in a CD or other investments they may have lockup periods, making your cash unavailable for a period of time.
(2) Systematically Invest in the Market
When the market starts to decline, it is advisable to dollar cost average your investing on the way down. This is because nobody knows how low a market will go from its current level and if you buy the market at regular intervals all the way down until it levels then your buy in is averaged out and you don’t miss out on a possible recovery of gains. Its extremely difficult to predict the bottom on the market, so as long as your average buy in is lower than where the market started, you will be primed to benefit from gains in the market.
(3) Update Your Resume or Prepare Your Business to Prepare for the Next Recession
If there is a market recession it likely means that big companies will have to lay workers off as they will not be able to afford their salaries any longer. This means that you may be out of work and you will want to have your resume ready in case you need to start applying for jobs right away. While things are going well is the best time to update your resume and be prepared.
If you are self-employed, you may be insulated from having to apply for work, however its possible your business will suffer in the next recession. While it’s a good idea to have an updated resume handy, you will want to start thinking about how you can adapt to a new market if you would anticipate a drop in revenue as part of the recession.
Remember its not a matter of if, but when the next recession will happen so if you live in Washington State and are looking for options for eliminating your debt to prepare for the next recession, give Symmes Law Group a call at 206-682-7975 to speak to a debt relief attorney and learn about your options.