Personal financial planning tips for recession from a CFP and author

  • Some financial analysts predict that there will be a recession within the next 12 months.
  • A recession, along with rising inflation and interest rates, can really take a toll on Americans’ wallets.
  • Now is the time to make your finances more flexible before the recession hits.

With inflation at a 40-year high and interest rates rising rapidly, consumers could be on the brink of a recession. The Conference Board estimates a 96% chance of a US recession within the next 12 months.

Consumers are already dealing with higher grocery and utility bills. A recession usually brings with it job uncertainty, tighter lending policies by financial institutions, and slower investment growth. All of this leads to a possible recession, putting consumers’ financial security at risk.

Preparing for any nasty effects from a recession should start long before the economic downturn begins, and it’s not too late, according to Jamie Hopkins, a certified financial planner and personal finance and retirement expert. He believes there are tangible steps investors and consumers can take to protect their financial goals. In her upcoming book, “Find Your Freedom,” Hopkins advises that working with a financial planner will allow you to live your best life by design, not by default. His goal with this book is to help people have a better retirement and find the freedom to use their money well.

He shared with Insider his top strategies for protecting your finances before and during a financial downturn.

Be smarter with your cash

Many people who see a recession on the horizon may immediately start selling investments and want to keep their cash in a regular savings account; Hopkins warns against it.

“Parking cash in the bank is not the best thing. If you can be strategic and smart during a recession, it can be a good time to invest,” Hopkins said.

He added: “Look for cash equivalents like ETFs. If you’re looking for a place to stash cash, there are mutual funds and REITs. Having too much cash in the bank during this time can lead to missed opportunities for investment growth.”

Put off expensive purchases for a while

Experts generally recommend not spending more than 30% of your net income on discretionary purchases. With high inflation and rising interest rates, it may be best to put off big expenses that aren’t necessary.

“If you can put off buying a house, expensive vacations, etc., it’s wise to do so,” Hopkins said. “As we head into an economically uncertain period, it is best to minimize discretionary purchases until we are back on solid footing.”

How do you service your debt?

In troubling economic times, the first thought may be to try to pay off all debt, but having access to that money for emergencies or investment opportunities may be a better use of those funds.

“There’s a difference between negative high-interest credit card debt and an emergency mortgage or low-interest line of credit,” Hopkins says. “Being in a position where you can effectively respond to emergencies or even job losses better prepares you for an economic downturn.”

Continue to grow your investment portfolio

If you’re close to retirement, consider cashing out.

“If you plan to have, say, the first 2 years of your retirement withdrawals in cash and ready, you don’t have to worry right now about what the market is doing and how inflation and interest rates are going to affect your portfolio,” Hopkins said. .

It’s also important not to make snap decisions about your portfolio. “Think about where you are now and don’t do anything to jeopardize that based on short-term economic events. “Retirements are typically 20 years, a recession is likely to last a year,” Hopkins said.

Prepare your finances before the recession hits

Taking steps to prepare for an economic downturn will eliminate the stress and panic that can occur during a recession.

“I cannot stress this enough. don’t wait until the last minute and panic, you’re almost always going to make a bad financial decision when it’s based on stress and panic,” Hopkins said. “If you’re nervous that your financial picture is slipping, consider what steps you can take to strengthen your financial position.

“It is during these times that having a financial plan is important. If you have a good financial and investment strategy, you will be in a strong financial position for any downturn.”

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