Every day seems to bring new headlines about the next recession — what will cause it, when it will hit, and how bad it will be. Today, for example, MarketWatch is prominently displaying this article: "Why a major trade war could mean a ‘full-blown’ recession."
Of course, it’s all just speculation. No one knows when the next economic downturn will hit. Still, it’s a reality that there will be another recession. Just as the stock market cycles between bull markets and bear markets, the economy cycles between periods of expansion and contraction. And even though it happened 10 years ago, the last recession was so severe that a new Transmerica survey (PDF file) found that over half of today’s workers say they still haven’t fully recovered.
So, it’s worth considering the steps you can take to prepare for the next recession.
Shore up your employability. Those hit hardest by the last recession were the people who lost their jobs and remained unemployed for a long time. In October of 2009 (after the recession had officially ended), unemployment in the U.S. hit 10.1%. During one five-month stretch, nearly 750,000 jobs were lost each month. By contrast, today’s unemployment rate is 4%.
While there’s no guaranteed way to keep your job, there’s much you can do to strengthen your employability, such as keeping your work skills current. That may mean going back to school. Does your employer offer tuition reimbursement? If so, that’s an incredibly valuable benefit that far too few employees take advantage of.
But you don’t necessarily need another degree. Participating in workshops, reading the latest books or blogs in your field, or taking online courses are other ways to keep your skills sharp.
Build a cushion of savings. When all is well — your job seems secure, the bills are easy to pay — it can be tempting to ignore the constant drumbeat of warnings to maintain an adequate emergency fund. And it appears that many people are ignoring such warnings. The Transamerica study found that the median amount of emergency savings today’s workers have is just $5,000.
For most workers, that wouldn’t last very long if they lost their job. What about you? If you lost your job today, how long would you be able to pay your bills with the amount of money you have in emergency savings?
If you don’t have an adequate emergency fund but you’re contributing to your retirement plan, consider temporarily reducing or even suspending your retirement plan contributions in favor of building your emergency fund.
Pay down debt. The greater the gap between your income and your cost of living the better you will be able to withstand a hit to your income. One of the best ways to increase that gap is to pay off debt.
If you have credit card debt, a vehicle loan, a student loan, or another form of debt, run some numbers with our accelerated debt payoff calculator to see how much faster you could be out of debt by adding more money to your minimum payments each month.
Start by listing your debts from lowest balance to highest. Then run some what-if scenarios with various extra amounts you could add to your debt payoff plan (you’ll see where you can enter a number right below row 10).
The calculator makes two important assumptions — first, that you will make fixed payments on each of your debts. With a credit card balance, your minimum required payment is based on a percentage of your balance. As you make payments, your balance will decline (assuming you’re not still using your card), so your minimum required payment will decline as well. Making this declining minimum payment is a big reason why it takes so long to get out of debt. So, be sure to fix your payments on all of your debts, adding any extra amount to the payment on your lowest balance debt.
The second assumption is that once your first debt is paid off, you will take the full amount you were putting toward that debt and apply it to your next lowest balance debt.
Again, none of this is meant to suggest that we think a recession is imminent. But we do suggest taking an honest look at how well prepared you are. As President Kennedy famously said, “The time to repair the roof is when the sun is shining.”