Generally, a recession means a significant slowdown in industrial and trade activity. Which in turn leads to an uptick in unemployment, a downturn in real estate values, lower investment values and economic activity, a falling stock market, and a dip in interest rates. All of which can seriously impact your wealth-building progress.
Inflation was at a 40-year high just recently, the Federal Reserve has been raising interest rates faster than it has in more than a decade, and investors are seriously worried that 2023/2024 will herald the beginning of the second great depression.
But, if you’re well prepared for the worst to happen, you can plan to mitigate the effect on your finances if a recession hits. Smart moves ahead of a recession involve following the first year internal medicine resident code and always being prepared!
A recession won’t only damage the economy, but it’s also likely to have a major impact on your personal finances because of changes in interest rates and precarious job security. This is why we recommend taking the following steps to ensure that your financial plans aren’t derailed by potential interest rate drops.
So, here's how you can build a financial backup plan to help prepare for a recession predicted by financial experts. Even if your income as a doctor is high right now, things can change quickly, so this following tips may prove to be very helpful:
Budgeting to Build Your Wealth
Even in times of economic growth, living within your means is the best way to grow your wealth. And that means making sure that monthly expenses such as rent or mortgage payments, car payments, and discretionary spending stay within budget so that you're feeding your savings accounts rather than servicing debt payments with any extra money, not taking on more debt.
So, to prepare for a recession in an economic downturn, you should be very mindful of staying within your budget. If you're serious about creating a financial future that enables you to create generational wealth or boost your retirement account, you need to start by being intentional about how you spend money.
Keep Your Good Credit
Hold off making a down payment on big-ticket items, a new car payment, or even any extra payments on low-interest debts before thoroughly planning your strategy for recession. As you intentionally don't take on new debt, pay down high-interest debt, and bolster your savings accounts, keep an eye on your credit score.
Now is a good time to get any blemishes cleared up with the credit bureaus so that your excellent track record can support you if need be. Remember, credit is a tool to be used wisely. If you find yourself in the position of needing a credit line at any point in the future, take intentional credit-boosting actions now so that your credit can support you when you need it to.
Start by pulling your credit report, not just for your score but so that you can confirm the creditors, balances, and activity listed. Good credit doesn't just magically happen, typically it's built intentionally over a sustained period. Your clever financial decisions should help you widen the gap between income/expenses so that you can invest in the things that help you save for the future and achieve your investment goals.
Build an Emergency Savings Fund
To recession-proof your finances, you really need to prioritize building an emergency fund.
Your emergency-saving safety net can;
save you needless stress
help you avoid becoming financially over-extended
Ensure you don’t have to leverage debt just to get by
Step one is putting aside 3 to 6 months of your basic living expenses to mitigate the risk of changing jobs or even disability. Then you can continue the process by slowly boosting your emergency fund to a year of basic living expenses.
When you’re calculating your essential expenses, remember to add in everything you need to get by in your normal daily life - groceries, housing, utilities, and transport - and build that emergency fund in a separate savings account so you're not tempted to dip into it for other things.
Where Should You Put Your Emergency Fund?
Then you need to figure out where to keep your savings. Currently, over the last year banks have raised savings yields quickly in response to the Fed’s aggressive rate hikes, which can make that an attractive option. But, it's important not to sacrifice liquidity for yield.
In a great recession, you don't want to lock your cash up too tightly, but rather ensure that it remains accessible in case you need it because of an emergency to cover expenses.
It's critical to build up an emergency fund while your financial situation is stable, or the time may come when you have to start making difficult decisions about withdrawing money from your retirement account or applying for a home equity line of credit (HELOC).
Diversify Investments in an Economic Downturn
When the going gets tough, having a diversified investment portfolio is crucial. So, one of the most important things to do ahead of an economic recession is to ensure that your investments are evenly spread and your cash isn’t all tied up in one place. Spread your investments across multiple industries and holdings to ensure that a dip in values in one area of your portfolio doesn’t negatively impact the overall value.
Look for long-term, stable assets with as little volatility as possible. Many doctors already have employer 401Ks, separate brokerage accounts, real estate, and even business investments. We’ve found the most stable, recession-resistant options to be in commercial real estate syndications, like developments and multifamily apartment complexes.
Many investors panic that a financial downturn also means falling stock prices — and that can be true, but don't make significant changes to your investment strategy as a knee-jerk reaction. Remember that markets tend to be forward-looking, we might be preparing for the recession now, but most investors are looking ahead and planning for when the times get better.
Pay Off High-Interest Debt
With a possible recession snapping at your heels, the last thing you need is a stack of high-interest debt to pay off. If you can pay off any debt you currently have, you can potentially save a lot of money in interest payments. Then you can put the extra into boosting your emergency savings.
Request a copy of your credit report to ensure that you don't have any nasty surprises when it comes to paying off those debts.
We would always advise paying off any credit card debt BEFORE you plan any further investments, particularly because if you have high-interest debt, the cost of your interest payments may exceed the return on your investment.
Keep an Eye on Interest Rates
For instance, if you have a loan or credit card debt with a 20% interest rate, it’s far better to pay off that debt as a priority rather than putting more into investments as the average long-term rate of return on the stock market is likely to be considerably lower than that. Create a debt payoff plan to ensure that you're paying off more than the minimum payment on your personal loan or credit card.
If you've been wanting to refinance any larger assets to lower payments or secure lower rates or better terms, now is the time - not once the recession hits. Typically banks tighten policies during tough economic times, making it even harder for consumers to get on their feet.
So, as you review your car, home, credit, and loan statements this month, take special notice of your balances and interest rates. Sometimes a simple call to the creditor can create savings for you. Other times, you discover that refinancing isn't a bad idea.
Getting ready for an economic downturn is certainly achievable. Despite the challenging circumstances that lie ahead, it is wise to proactively prepare and ensure that unpredictable circumstances do not derail your financial objectives.
Simply being mindful of your financial situation is a significant stride. Collect all your statements, credit report, and other resources used for monitoring your finances. Then, set aside dedicated time for a thorough examination of all your accounts.
Feel free to generate a spreadsheet or input all the data into an online tracking system if you like. Either way, armed with this knowledge, you can monitor your progress, devise a plan of action, and adjust your strategy as necessary.
Finally, join us! Apply today at Nima Equity Doctors Investing Club to get the more insights and education on real estate, finances and syndications. You can get also the “inside scoop” on our past and upcoming deals. Once you apply to join the club, I’ll get on a call with you so we can see if we’re a good fit to invest alongside each other on any future real estate syndication deals! I can’t wait!