How to prepare for an economic downturn in 5 ways

By Laura Adams | MBA and Host of Money Girl | Sponsored Content

When facing economic uncertainty and market volatility, it's important to be proactive and take steps to prepare financially for an economic downturn. What is an economic downturn? While economists have different definitions for it, an economic downturn is a prolonged period of negative growth that can cause lower stock prices, layoffs, and wage cuts.

If you're feeling uneasy about the economy, here are five ways to financially prepare for an economic downturn and reduce financial stress.

1. Increase your emergency fund

According to a recent BankRate survey, only 43% of U.S. adults said they would pay for a $1,000 unplanned expense using funds from their savings account. While everyone should have emergency savings, it's even more critical during an economic downturn.

An excellent rule of thumb is to keep at least three to six months' worth of your living expenses in an FDIC-insured savings account. However, depending on you and your family's needs, you may need more or less. Another target is maintaining a minimum savings of 10% of your salary or household income.

A healthy cash cushion for unexpected hardships, such as losing your job or business income, should never be considered a luxury. A reserve gives you flexibility and can reduce financial stress in an economic downturn.

Emergency fund questions to consider before an economic downturn:

• How much of an emergency fund do I have?
• How much of an emergency fund should I have?
• Where do I keep my emergency fund?

2. Reduce high-interest debt

Once you've got enough cash in the bank or are regularly saving for emergencies, review your debt. Make it your top priority if you have accounts charging high interest rates, such as credit cards or payday loans.

Using a balance transfer credit card may be an excellent solution for cutting your interest expense. You move your balance from a high-rate account to a new credit card that charges no or lower interest during a promotional period. Most cards charge a fee to transfer the balance over to the new card, so make sure to do your research.

Not only does having less debt take the pressure off if you lose your job or get a pay cut, but eliminating high interest can free up funds for other purposes, such as retirement.

Credit card debt questions to consider before an economic downturn:

• How much credit card debt do I have?
• How do I pay down credit card debt fast?
• What is a balance transfer credit card?
  
  

3. Have the right insurance

An essential part of healthy finances is protecting it from various potential risks, especially during uncertain times. It’s important to do your own research, but here are the basics on some insurance policies to consider and their common uses:

• Homeowners insurance is required by mortgage lenders and is intended to help pay to repair or replace your home and belongings after a covered event, such as a natural disaster or theft, up to policy limits.
• Renters insurance may pay to repair or replace your possessions damaged by a covered event. Note that landlords typically don't insure your belongings or liability, so having a renters policy is a wise way to limit potential future risk.
• Health insurance may help maintain your physical and financial health by limiting your annual out-of-pocket medical expenses. Even if you're young and healthy, an accident or illness could leave you with substantial medical bills.
• Disability insurance typically replaces a portion of your income, such as 60% or 70%, if you cannot work due to a covered illness or accident. Remember that health insurance doesn't cover your living expenses if you can't work due to a health problem.
• Life insurance may pay your beneficiaries, such as a spouse, partner, or children, after your death. It can help provide financial security for anyone who depends on you financially

Remember that workplace insurance ends on the last day of the month if you lose your job during an economic downturn unless you pay for COBRA continuation coverage.

Insurance questions to consider before an economic downturn:

• What types of insurance should I consider before an economic downturn?
• What types of insurance do I have?
• What do I need to know about COBRA continuation coverage?

4. Secure or increase your income

If the economy struggles, an excellent way to strengthen your financial situation is increasing your income or keeping it as steady as possible. For instance, if you've always wanted to get an advanced degree, a real estate license, or certification for a new career, consider pursuing it now.

Also, maintaining strong connections can set you up for success in a more competitive job market or help you find potential customers if you become self-employed.

Income questions to consider before an economic downturn:

• How do I make additional income?
• What is a side hustle?
• How do I become self-employed?

5. Continue contributing to retirement

When the economy goes south, many people stop contributing to retirement because they believe they can't afford it. While it's easy to get spooked by market volatility, don't let it keep you from your goal of building a nest egg. Consider maxing out a tax-advantaged retirement account, such as a 401(k) or IRA, which may help build wealth and reduce taxes simultaneously.

Contributing to retirement questions to consider before an economic downturn:

• How do I plan for retirement?
• How much do I need to retire?
• What’s the difference between a 401(k) and IRA?

Ready to get your finances in order?

Following these tips can help put you in a solid financial position during times of economic uncertainty or an economic downturn. The bottom line is that it's always a good time to reevaluate your finances and improve what you can.