It happens and there is not much that we can do to stop it. As part of the natural economic cycle, the economy suffers and the equity markets experience a correction or a recession. Remember, a correction is a decline of at least 10% but not more than 20%. And, it can be in a single asset class and not necessarily across the whole economy. A recession is when the entire economy declines for several months. If prolonged, it can become a full-blown depression. Generally, investors tend to wait out either, but there are steps you can take!
Let’s look at cash flow issues. During a correction or a recession is a great time to take stock of your cash position. A few areas to consider and questions to ask include the following.
How’s your emergency fund? You should know the balance and how long it could sustain you during an income disruption. It may be a good time to add to your emergency fund if you are lucky enough to still be working and have income.
Speaking of working, what’s the status of your employment? If it’s solid, build your cash reserves, pay off additional debt, and stick to your investment plans. If your job is gone, now is the time to really assess that emergency fund, start paying only minimum payments on debts (don’t skip or miss payments), file for unemployment if you are eligible and seek out any and all community or state-based aid programs. Don’t be shy! It’s why they exist. It’s ok to dip into that emergency fund as well. That’s what it’s there for.
What about that monthly budget? Now is a great time for you to PERK up! PERK stands for Postpone, Eliminate, Reduce, and Keep. You need to sit down and review every item of outgoing money in your budget. Decide which items you can PERK. Put a P next to those items you can postpone (vacation savings), an E next to items you can eliminate (the gym, cable), an R next to items you can reduce (services), and K next to things you must keep (rent/mortgage, insurance).
What about asset and debt issues? Again, making a move while you are still employed during a correction or recession may be more manageable. Once unemployed, your options dwindle and basic survival becomes more immediate.
Consider your mortgage. If you are working and able to refinance it may be a good move. Sometimes during a recession or correction loan rates drop due to fewer qualified borrowers and the availability of funds. It could make sense to refinance if you can get a lower rate, a low-or-no cost refi option, and are planning on staying in your home.
How about those investments? If you happen to have extra cash on hand, a market correction or recession can be a good buying opportunity. Evaluate your current portfolio allocation, consider rebalancing, take a long-term view and consider adding to your holdings while valuations are low.
You might wish to use this correction or recession to do some tax loss harvesting. You can sell some losing positions to offset gains in other positions. This can be done in conjunction with rebalancing if you have a taxable account.
As an independent Certified Financial Planner™, I can help you focus on your finances month-to-month and not just during a correction or recession. Contact me and let’s get started. #talktometuesday #getstarted #HowIcanHelpYou #GetHelp #Hireaplanner #MarketCorrection #vacation #CFPPro #savemoney #Recession #Depression