Recession Checklist - How to prepare for a downturn?

TL;DR: To prepare for a recession, spend a few minutes reviewing job security, savings, expenses and investments.

Recessions are an inevitable part of modern life. Still, there’s never a good time for one. Maybe you’re at a pivotal moment in your career, just a few months away from promotion. Maybe your family member has a chronic illness, and you can’t afford to lose health insurance. Perhaps you just signed a 30-year mortgage that was slightly out of budget. All of these factors make the prospect of a prolonged economic downturn even scarier.

Luckily, economic cycles have been churning for centuries, so we know a lot about how to deal with downturns. Each recession is different, but they all have similarities too. Over time, you can observe what investment and personal finance strategies work best. This will help you come out of a recession with your life and finances intact.

When a recession looms, you might be tempted to avoid taking stock of your financial situation - why add the stress if it’s out of your control? But it’s better to face the situation head-on so you can make appropriate adjustments.

So without further ado, here’s your recession checklist:

Job Security:

This includes both how likely you are to keep your current job, and how likely you are to get a new job in a down economy. It also depends on the sectors impacted. For example, if you got laid off as a recruiter at a Big Tech firm, it might take you longer in this recession to find another one because most tech companies have curtailed hiring. But if you are working in the services/hospitality sectors and get laid off, the chances of finding a job within a few weeks are very high.

Spouse Job Security:

If you’re married, consider the income of your spouse as well. Also factor in their job security and health benefits. If you work in different industries, this can be a positive thing since it diversifies risk.

Severance Package:

Some companies, especially in the tech space, give generous severance packages that pay employees their full salaries for many months after layoffs. Severance packages are an important consideration in a downturn — they can add months of financial stability, providing a safety net while you look for a new job. Still, it’s best not to rely too much on a generous severance package. Companies have the final say in whether they give severance. And a company might collapse, which could mean no severance.

Monthly Expenses:

Divide your monthly expenses into fixed and variable costs. Decide which fixed costs can be eliminated or reduced if needed. Also give yourself an honest assessment of what lifestyle changes you’d be willing to make. If you’re stressed about a recession, it can be worth making changes before anything happens — a fancy vacation isn’t worth taking if it creates weeks of prolonged financial stress.

Savings:

How much money do you have in an emergency savings fund? Xillion can help you figure out the ideal amount, factoring in many of the things we discussed in this blog. Consider your savings and investments in light of the other factors discussed here. How long would your savings last? At what point would you need to tap into long-term savings, like a 401(k)? If the answer makes you uncomfortable, consider putting more money in liquid savings.

Portfolio:

How exposed are you to the market? If things get bad, when would you need to tap into your investment portfolio for money? Ideally, you don’t want to be in a position where you need to tap into long-term investments to cover daily expenses. This is especially true for retirement funds with tax benefits. To learn more about how to optimize your investment portfolio, check out Xillion’s Portfolio Analyzer.

A final word of advice: don’t overreact, especially when it comes to investing decisions during a recession. We know this is easier said than done.

Most Americans aren’t sufficiently prepared for a recession. But if you’re reading this, chances are you are more diligent about preparing for the worst. In fact, there’s a chance you could be too conservative and miss out on big opportunities.

Be cautious, but don’t panic.

An average recession lasts around 18 months. The S&P 500 might go down 30% or 40% during a recession. Rather than sell your investments, it might make more sense to buy more of them because fortunes are built in bear markets Xillion's Invest helps you identify stocks and funds that are right for you).

You will get through this. And if you play your cards right, you’ll come out of it in an even better financial position than before.

A mentor can help you maintain perspective. Many of Xillion’s mentors have weathered severe recessions, emerging from the chaos in even better financial shape. Our mentors can advise you on how to make the most of a down economy. If you’re interested in talking to a mentor, sign up for a session here.