Always be prepared


I read an article the other day that focused on how unprepared our country is for the next recession. Many people reading that same article may have a reaction of surprise at the implication that a recession was on the horizon, given that all the economic indicators are positive now and trending higher, suggesting that the threat of a recession is quite low.

That said, given that the last recession began close to 10 years ago, it is not inconceivable that the next one is a couple of years off versus a decade away. While our government at all levels may not be prepared, we, as individuals, should be taking actions regularly to position us for whatever downturn comes to pass. We may not be able to convince the government to prepare, but we can prepare ourselves. Let me review some of the steps you may want to consider taking now while economic times are favorable:

1.    Establish an emergency fund if you don’t already have one. The fund should equal at least three months’ expenses – six months is preferable, and more is recommended if your income is commission-dependent. Invest the fund in fairly liquid assets so you can tap the fund if needed without incurring penalties or losses.

2.    Pay down/off debt. Start with short-term debt such as credit cards and installment loans and move to lines of credit and automobile loans and, ultimately, mortgage debt if it makes sense economically. Reducing monthly payments provides you greater flexibility if your income takes a hit.

3.    Don’t refinance debt if you are close to retiring it. Many lenders will offer attractive terms to refinance debt with reduced payments in return for extending the term of the loan. If you have years to go before the debt is satisfied, then refinancing may make sense.  However, if you can retire the debt in the next two years, don’t refinance – just pay it off.

4.    After you’ve fully funded your emergency fund and paid off as much debt as makes sense, save more money. Under present tax rules, you can increase your contributions to a 401(k) plan to $18,500 per year ($26,500 if you are 50 or older) beginning in 2018. You may be able to contribute to an IRA as well where the limits are $5,500 for those under 50 and $6,500 per year for those 50 and older.  And, you can always fund an after-tax savings or investment account where there are no limits.

5.    Lastly, consider placing savings or IRA funds in a mutual fund that is tactically managed, rules algorithm that will trigger into a cash position to avoid large draw-downs.

Predicting recessions is part science, part insight and part luck. There are some who constantly predict downturns because they want to be right when one happens.  Remember the old adage that even a broken clock is right twice a day. The reality is that no one knows, with any certainty, when the next recession will occur. But, with the proper planning, you don’t need to worry about it – you have followed the old Boy Scout motto of always being prepared.