There’s an intense debate brewing between corporate leaders on the likelihood of a recession coming for the U.S. There seems to be trouble on the horizon due to decades-high inflation, labor shortages, and impending interest rate hikes. Elon Musk is reportedly cutting 10 percent of Tesla’s staff in anticipation of the downturn. Researchers for the Financial Times, Bloomberg, and other news outlets agree.
As an accomplished investor, philanthropist, and Founder of Denali Venture Philanthropy, Bo Parfet has studied the ebbs and flows of the markets and regularly advises his team on making measured investments that create sustainable improvements in peoples’ lives. Bo has some wise words on preparing for a recession and ensuring your assets are protected.
Don’t Make Emotional Decisions
The first and best piece of advice is to stay calm. Don’t make rash decisions based on emotion. Perhaps this is best illustrated by something Bo Parfet said in a recent Boss Magazine interview about his experience climbing the world’s highest mountains. “The obstacle is the way. There is great learning, and if you can push through it, you usually come out a better person.” For example, if you sell your stocks impulsively out of fear, you might miss the chance to recover when the market eventually bounces back. The most successful investors are playing the long game and choosing each step rationally. Slow and steady wins the race!
Eliminate High-Interest Debt
When anticipating a recession, paying off high-interest debt as early as possible is critical. Generally, any payments at 5 percent or higher should be looked at. Debts like credit cards and personal loans will become a significant burden if interest rates continue to rise. Even student loans can hover around 5 or 6 percent. You could waste hundreds or thousands of dollars in interest payments alone. This is also true on an organizational level, as Bo Parfet points out. Business owners should review all their rates. It’s best to clear these debts while you have the income so that your emergency funds during a recession will go further. To find out if your rates are high, you can compare them to loan rates today.
Hold Off on Refinancing Your Portfolio.
Bo Parfet recommends being consistent in your investment’s long-term rather than suddenly refinancing. For example, he would not advise anyone to refinance their homes as interest rates will likely continue to rise. Follow the market’s long-term growth, and don’t stop contributing to your retirement through your 401(K) and other accounts.
You may want to ease your portfolio risk by reducing investments in volatile stocks. Bo recommends speaking with a financial advisor to balance your stocks and bonds.
Build an Emergency Fund
It’s wise to build an emergency fund regardless of an impending recession. Yet, according to a 2021 Bankrate survey, more than half of Americans could not last more than three months on their savings. An emergency fund is a savings account that can cover unforeseen costs like medical bills, unemployment, or car repairs. It’s always better to borrow from your fund than to rely on the banks and other lenders.
Ideally, you should aim for about six months of savings to cover all your essential costs and keep them in a high-yield savings account. This way, you’re protected in the event of a sudden job loss or another significant event. If family members rely on you for support, be sure you have life insurance set up.
Cut Your Overhead Costs
When it comes to personal budgeting, many expenses are higher today than ever–especially if you live in a big city. Most people overspend on cable and mobile services, ordering food delivery, and miscellaneous shopping on sites like Amazon. Bo Parfet’s advice–consider your budget a living document that can be adjusted at any time. Review your credit card statements to find recurring expenses–maybe subscriptions you didn’t even know you had. Try to identify any large expenses you tend to repeat and see if there’s room for compromise.
Weigh out your immediate needs with your long-term goals, and don’t give up something that contributes to your long-term well-being.
Make Use of Community and Government Aid Programs
Luckily, the government will step in to provide support if a recession does come our way. For example, during the Covid-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act utilized a temporary moratorium on foreclosures and evictions for homeowners with federally backed mortgages. You can find more information about government support on the Consumer Financial Protection Bureau website.
Whether or not you believe a recession is imminent, these steps will put you in a much more secure position financially. Remember that tip number one is to stay calm. People often forget that the stock market doesn’t always accurately predict an economic recession. However, if you feel a recession will affect your investments and future, it’s best to take these precautions now!