Get Ahead of the Next Economic Downturn
The COVID-19 pandemic has affected everyone in one way or another. For many, the shutdowns, furloughs and layoffs were an eye-opening experience in how quickly one’s financial situation can change. Preparing for an economic downturn might involve reevaluating your priorities, and there is no magic formula or one-size-fits-all approach. For instance, people near retirement will have very different considerations than those in their 30s. As the effects of the novel coronavirus continue to ripple through the economy, we’ve compiled some general ideas of how to prepare for economic downturns in the future.
- Reduce debts: Whether your debts are credit cards, student loans, medical bills, car payments or mortgage payments, you can strengthen your financial position by focusing on paying down debt. Reconsider any decisions that would involve taking on more debt and explore refinancing options to take advantage of potentially lower interest rates.Paying only the minimums on multiple debts each month is costly, thanks to interest, and makes it difficult to ever pay down the debt(s). One strategy for paying down multiple debts focuses on paying more toward the debt with the highest interest first while continuing to pay the minimums on all the other debt. Overall, less interest is being paid on the high-interest debt, saving you money. When that debt is paid off, shift your focus to the debt with the next-highest interest rate.Another repayment strategy is to start with the smaller loans and focus on paying off the smallest debt first. As each debt is paid off cash flow is freed up to be applied to paying off the next debt.
- Retain cash: Having cash on hand is critical for handling emergencies and providing yourself with opportunities. Set a savings goal, such as having three to six months’ worth of expenses set aside for emergencies. Automatically transferring funds to a savings account with each paycheck makes it easy to start saving for emergencies. Some employers allow for employees to set up multiple direct deposits that allow them to split their paychecks between checking and savings accounts. It is harder to spend your emergency savings when it in a separate account.If you have the forethought and ability to accumulate additional cash reserves, you may be able to take advantage of investing strategies that become available during economic downturns, such as buying stock at depressed prices.
- Invest in yourself: Consider strengthening your skills and qualifications to keep yourself relevant and marketable in a shrinking economy. The idea is to protect yourself by improving your intellectual assets as well as your financial assets. Look into courses offered at your local community college or take advantage of the endless educational resources online.
- Assess spending habits: Don’t wait until a financial crisis hits to examine your discretionary spending habits. If your credit card bills are mounting with unnecessary purchases, now is the time to curb costs. Take the time to comb through your budget and gain a deeper understanding of your essential vs. nonessential expenses. Do you have services and memberships that you are paying for and don’t use? Cancel those services and put those savings toward your financial goals.
- Start a “side hustle”: Turning a hobby into a business can act as a safety net in case of a layoff. Supplementing your income stream will not only give you peace of mind but also keep you busy during a shutdown or layoff that impacts your main income source. In the short term, your side business can help you make ends meet, and eventually it may even develop into a lucrative full-time career.
You can start your work on any of these ideas today, or as soon as you are able.
None of us know what will happen next. At JCCS, we want to help you develop a financial plan to protect yourself so that you can survive and thrive no matter what the future holds.
* This article is not a complete listing of all the details related to the topic and you should contact your CPA for a more detailed discussion regarding these items and how they may apply to your specific situation.