Recessions are a normal part of our country's economic cycle. But that's little comfort when a prolonged one hits and throws your finances for a loop. And it's also, to some degree, tricky to predict when a recession will strike.
That said, 52% of Americans are worried about a recession happening within the next year, according to a recent FinanceBuzz survey. If you're afraid that a downturn is imminent, here are a few things you can do to protect yourself.
1. Boost your emergency savings
During a recession, investment values can tumble. That's not awful if you're in a position to leave your portfolio alone and ride out that storm because remember, you only lose money on investments when you sell them at a price that's less than what you paid for them. But if you want to help ensure that you won't need to sell off stocks to cover unplanned bills, pad your emergency fund or create one if you don't have one yet.
As a general rule, it's wise to have between three and six months of essential living expenses tucked away in the bank (not in investments, because again, those can lose value). If you're really worried about a recession, lean toward the higher end of that range, or even go a bit beyond by aiming for six to nine months of living expenses in savings. That way, you'll have money to tap if unexpected bills pop up, and you won't have to rely on your investment portfolio.
Another thing: Job loss can be an unfortunate byproduct when a recession hits. Having extra money in savings will give you a means of paying your bills in the absence of a regular paycheck.
2. Line up some side income
It never hurts to have a solid stream of income outside of your main paycheck. You can use that extra money to save, invest, pay off debt, or cover larger purchases, like electronics and furniture. But if you're fearful of a recession, a side gig can serve another important purpose: It can be your backup income in case your primary job goes away.
Imagine you start designing websites on the side for a few hours a week, as time allows. If a recession strikes and you lose your main job, you may be able to ramp up on your design work while you go on interviews and blast out resumes, thereby ensuring that you have some money coming in while you attempt to find another full-time job.
3. Make sure your portfolio is diversified
During a recession, it's possible for some segments of the market to get hit harder than others. That's why having a diverse portfolio is key. Not only should yours include both stocks and bonds (with a concentration on the former if you're relatively young), but within each category, your investments should be spread out among different sectors. For example, if you currently own a lot of bank stocks, swap some of them for energy stocks and health stocks. That's just one example, but the key is to vary your investments so that if one segment happens to retain its value during a recession, you'll benefit there.
If you're not really sure how to diversify, choose index funds that give you broad market exposure. The Vanguard Total Stock Market ETF (NYSEMKT: VTI) is a good place to start because it effectively tracks the entire stock market to some degree. Vanguard's S&P 500 ETF (NYSEMKT: VOO) is another decent bet as it tracks 500 of the largest U.S. stocks trading on the market.
The idea of a recession can be scary. If you make an effort to prepare properly, you'll increase your chances of riding one out smoothly.
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