Friday, August 30, 2019

Preparing for a Recession

I was asked the question on Quora: Is there an impending recession in 2020, and if so, how do we prepare for it?

Here's my answer:

While there is a lot of talk about a recession coming in 2020 or 2021 or 2022, no one really knows for sure. Some of this excitement is over the yield inversion, but while all recessions follow a yield inversion, not all yield inversions precede a recession. So it’s a correlation, not a causation.

However, you should always be prepared. I like to think one should hope for the best, plan for the worst. By following basic principles of personal finance, you should be able to get through any recession, or any hard times that may come your way, allowing an event of this kind to be not so bad.
  1. Have a financial plan and follow it. Use a budget. Create a net worth statement. Always use a budget. This is important and a basic step that a lot of people don’t follow.
  2. Have a budget and follow it. Did I repeat myself? Yes. It’s that important. How to create a budget.
  3. Have an emergency fund of 3 months (or better) in living expenses. I finally built mine to 6 months. I sleep well at night. Do not think that credit cards can be used for emergencies. This will lead to more troubles.
  4. Get out of debt and stay out of debt. Consumer debt will kill any household financial plan, especially if you lose a job or there’s a recession. The only debt you should have is a mortgage on your house.
  5. Once you’ve covered 1 through 4, save/invest 10 percent of your income in a retirement fund.
  6. You can find more information on this blog. 

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