6 ways to prepare your personal finances for high inflation and a recession, according to top wealth experts

6 ways to prepare your personal finances for high inflation and a recession, according to top wealth experts

Preparing now could save you headaches if a recession hits. As a promising young investor by the name of Warren Buffett once quipped: Only when the tide goes out, do you realize who has been swimming naked.

Well, time to check your trunks.

The word “recession” has been flying around lately, and not without reason. A witch’s brew of inflation, a bearish stock market, a crypto crash, hiring slowdowns, war in Europe, and rising interest rates have even the most seasoned investors scratching their heads about what’s to come.

In fact, the likelihood of recession within the next 12 months has spiked to 44%, according to economists surveyed by the Wall Street Journal —a level “seldom seen outside of an actual recession.”

More than anything, it’s a simple fact of market history: Sooner or later, a recession will hit full-force. One famed investor, ARK Invest CEO Cathie Wood, has mused that we are probably there already .

“What we do know is that recessions will occur, and they are part of a normal cycle,” says Rob Williams, managing director of financial planning and wealth management for brokerage Charles Schwab .

“It makes sense to have a financial plan that’s systematic, and ready for whatever the market will deliver—and hopefully you have that in place well ahead of time.”

So what’s an individual investor to do? Some things are far beyond your personal influence, like what happens with the stock market or whether inflation continues to rage around the world. But other things are very much in your control. And you would be wise to undertake those steps now, rather than wait until it’s too late. Bolster your emergency fund

Think of yourself as a military strategist: You want your finances to have multiple lines of defense, in case you ever find yourself under attack. And your first defensive wall is always the emergency fund.

That’s the cash you have on hand, right now, in case you face sudden and unexpected expenses: auto repair, job loss, a medical issue, a tax bill, or anything else. The Federal Reserve found that 32% of Americans wouldn’t be able to come up with $400 in a pinch—and that’s a problem.

“Have an objective to save three to six months’ worth of fixed expenses, and be realistic about how long it may take to get there,” says Heather Winston, director of financial planning and advice for financial services firm Principal.

“What you are doing is saving your future self from having to take on debt, and make other really tough choices when that rainy day comes about.”

If you don’t have that sum in your account right now, that’s job one, and it’s OK to start small. Trim back discretionary spending, try to lower fixed monthly expenses like the cable bill, get rid of unused subscriptions that are charging automatically to your card (the app Truebill can you help with that), and earmark windfalls like tax refunds or annual raises to your cash hoard.

If you are approaching retirement age, you might want to aim even higher and put aside enough cash to get you through a full year, suggests Schwab’s Williams. That way your hand won’t be forced to cash out too much of your retirement savings during a market bottom. Time to make a move?

In any approaching financial storm, one of the smartest actions is to slash your fixed monthly costs. For most people, the largest such cost by far is housing.

So if you happen to be a in a phase of life where you don’t need quite so much house—perhaps the kids have graduated and gone off to college, for instance—now would be an opportune moment to consider downsizing. The monthly differential between, say, a four-bedroom house versus a two-bedroom condo —along with all the associated costs like property taxes, landscaping, utilities, and upkeep—could be massive, especially when multiplied over many years.

“Downsizing now does make sense for people who have a lot of equity in their home,” says Daryl Fairweather, chief economist for brokerage Redfin. “If you are trading down, you could potentially afford to buy your next one in cash, and not get hit with rising interest payments.”

With the work-from-home trend that blossomed during the pandemic, you could also consider moving to a lower-cost locale, if your employer isn’t requiring you to be on-site in an expensive urban area anymore. According to a recent McKinsey survey, 35% of respondents said they had the opportunity to work remotely five days a week. “That’s a good option for people who are trying to […]

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