The stock market experienced quite a few drops in January, causing a frantic debate in the media over whether or not another recession is coming.
You might have been in college during the 2008 recession, or recently graduated and struggling to find a job. Or maybe you were a few years into your career and watched your 401(k) get cut in half. The recession was poorly-timed for Millennials like me who were just getting their careers started, and nearly half feel stressed and out of control when it comes to their money.
If history is any guide, there’s bound to be another recession in the future. But the good news is that you can be better prepared financially for whenever that happens.
Cash Is King
More than half of Americans have less than $1,000 in their savings accounts, and nearly a third of Millennials have nothing in savings. This is not a situation you want to be in if your car breaks down, you have unexpected medical expenses, or you lose your job.
Make emergency savings a top priority. Work toward saving a month of your salary at first, and once you achieve that, set your sights on three months’ worth. While many out-of-work Millennials possess the skills to find a new job quickly after getting laid off, that might be more difficult in a recession, when many companies have hiring freezes. Prepare to keep yourself afloat if you’re unemployed for awhile.
Deposit your money into a high yield savings account like Ally Bank and CapitalOne 360. Your money will be just out of sight enough so that you can avoid seeing it every time you login to check the balance on your checking account, but accessible enough so that you can withdraw cash in an emergency. I also like the ability to set up multiple savings accounts at these online banks and the ability to nickname them.
Pro tip: set up a separate savings account for travel so that you don’t rob your emergency savings to pay for your next vacation.
Having enough saved in your emergency fund will help you avoid taking on credit card debt to pay for things you really need.
Lose Debt, Gain the American Dream
Debt is a chain that keeps you tied down. You might dream of quitting that stable-yet-awful job, moving out of your parents’ house, or relocating to a new city — but you can’t keep up with your loan payments if you do, so you remain stuck.
Paying off debt will give you more security and freedom no matter what’s going on with the economy. How much cash can you free up by making a few small changes in your life? I’m not talking cutting out the occasional Starbucks run — try things like
- Swapping cable for a streaming service (about $60 a month in savings)
- Skipping the weekly professional manicure and painting your nails at home ($80 a month)
- Swap your pricey gym membership for a cheaper gym like LA Fitness or 24 Hour Fitness
You just saved nearly $200! And no, that doesn’t mean it’s time to reward yourself with a little shopping spree — that money must go straight toward your highest-interest debt first. While you’re paying off credit card debt, don’t pile on by charging even more to your card.
Learn How to Hustle
In an economy where job opportunities dry up, it’s important to protect your ability to earn an income. If there was ever any time to kick butt at your job, this is the time! Take on new challenges and don’t be afraid to humblebrag about your accomplishments. You want your boss to notice and think you’re irreplaceable.
Even better, diversify your income stream with a side hustle or two. It can be anything from a freelance writing, editing, or coding gig, to walking a few neighborhood dogs.
Even if your job is stable, don’t let yourself get too complacent. Keep your resume updated (especially as you gain new skills or get promotions) and don’t forget to network! You don’t have to shake hands at all the local job fairs. Any events you attend are a chance to make a connection with someone who might have some good job leads. That can be the next conference you attend — or the next birthday party!
Create An Investment Plan
If you own investments, a down economy is not the time to panic and sell everything. The best way to protect your investments is to:
- Diversity them: An easy way not to put all your eggs in one basket is with low-cost index funds across a variety of sectors: large cap, small cap, international, and bonds are a few good places to start.
- Think long-term: Invest with a long time horizon in mind (at least five years). Any cash you need in less than five years should be in a savings account instead. Create an asset allocation that matches your time horizon.
- Keep contributing to your investments: When the market is low, any money you contribute to your retirement or investment accounts is buying shares at a lower price. It’s like getting more bang for your buck!
Success in Any Economy
The 2008 recession was tough on Millennials, but you can recession-proof your finances with a bit of advanced preparation. Don’t let the gloom-and-doom 24-hour news channels scare you!
The millennials that kept investing in their 401(k)s and started Roth IRAs during this time are really glad that they did because they’ve experienced above average-returns. (Disclaimer: past performance is not indicative of future results.)
Protect your income, save for emergencies, pay down your debt, diversify your investments, and ride it out. The more you prepare, the more calm you’ll be whenever a recession strikes.