6 steps to handling money in a recession
In times of recession, there are many ways to handle your money and generate new possibilities for now and the future
Moody's Analytics Chief Economist Mark Zandi argues the economy won’t kick into full gear until it’s at the other side of the coronavirus pandemic.
The recession is officially here. According to the National Bureau of Economic Research, after an unprecedented 128-month expansion, the economy peaked in February and has been going downhill ever since.
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The big question now is, how long will it last? Unfortunately, no one can be sure, as there are many variables that can affect the economy, and many of these are unknown. Remember, before the advent of COVID-19, the economy was booming, and no one anticipated that a virus would overwhelm the world. There are also known possible instabilities -- political and trade tensions abroad, an unstable oil market, and the likelihood that unemployment will remain high.
And then there's your money. It doesn't matter if you're one of the 43 million workers who have applied for unemployment benefits or one of the lucky ones currently employed, you still want to preserve as much of it as you can. Here are six smart tips you can use now to make sure you survive the recession and come out the other side with your money intact.
1. Revisit your investments
This current recession has probably taught you a lot about your portfolio diversification. Did you take on too much risk and watch your portfolio decline even more than the broader market? If so, how did that make you feel?
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If the answer is "Not very well," you may want to reexamine and rebalance your portfolio and invest in stocks that can provide more stability. Take a look at adding some dividend stocks, because you'll still be earning income even if the stock price is declining. Or if you want even more security, consider selling some risky investments and putting money into Certificates of Deposit (CDs).
2. Don't panic-sell
Fact: You only lose money in the stock market when you sell. So don't panic sell! Did you know that the average long-term return of the S&P 500 is around 10%? But in order to capture that return, you need to have a long-term investing vision and plan to hold through the ups and downs. If you panic sell in times of crisis -- like now -- you'll miss out if your stocks recover and reach even higher highs.
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3. Tighten your budget
You've heard it again and again: When the going gets tough, toughen up and tighten your budget. There's no better way to generate free cash than to review your expenditures and eliminate -- even temporarily -- items that aren't essential.
Considering that so much of the country has been on lockdown, and restaurants, theaters, movies, sporting events, and other entertainment venues have been closed, saving money should be easier now than it is during normal times. Where have you been putting the money you've been saving during these stay-at-home times? If you're not sure, create a budget to track your spending and see where you've been saving. Then continue cutting back in these areas once the economy opens again.
4. Apply for a home equity line of credit
If you're still employed and have equity in your home, it may be a good time to apply for a home equity line of credit (HELOC). You generally need about 20% equity to qualify, but if you do, you'll have a credit line with a low interest rate at your fingertips in case you ever need it.
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Many HELOCs have a 10-year initial draw period when you're allowed to borrow money. During this time, you'll only need to pay interest on the money you borrow and not on the principal. After 10 years, if there's still an outstanding balance, it will convert to a regular mortgage loan and you'll have a set number of years (often 20) to pay it back.
5. Review your insurance policies
If you're stranded at home and looking for constructive things to do, begin a review of your insurance policies. You may find lots of cash lurking in their nooks and crannies.
Consider raising your deductibles, which could lower your premiums substantially. Also, you may not need all the coverage you have, and perhaps you have duplicate insurance. The money you save by tweaking these policies can provide extra cash during recessions.
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6. Invest for the recovery
Last, but definitely not least, manage your investments with at least one eye looking toward the future recovery. When the market tanks, it's a stellar time to purchase growth stocks because they'll be selling at a discount. Or consider adding to positions you already own, since you're already familiar with those companies.
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The recession is a time when opportunity will be knocking, so if you don't want to leave the door wide open, at least open it just a peep so you pick up some bargains.
The world may seem to be crumbling around you, but it's only temporary. After all, nothing lasts forever. In times of recession, there are many ways to handle your money and generate new possibilities for now and the future. By following the above tips, you'll be able to survive this challenging time and be prepared for the moment the economy and stock market soar again.