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Economic downturns may have upsides for the opportunistic.
Key points
- Evaluate your emergency fund and cash flow constraints.
- Take advantage of favorable conditions by refinancing debt.
- Lower future taxes by making a Roth conversion.
There’s no denying it — tough economic times are likely coming. Market indicators are increasingly pointing to an economic downturn, including grim predictions of falling markets. How can you take advantage of a recession? Read on to find out.
1. Be on the defensive
While recessions come with opportunities, such as depressed markets and low interest rates, they also come with financial threats including layoffs and decreasing nest eggs. Ahead of a possible recession, your top priority should be to shore up your financial plan.
An adequate emergency fund acts as a cushion in case of job loss or other unexpected financial need. Experts recommend that Americans keep between three and six months of expenses in cash savings. However, just as important as funding your emergency fund is knowing when to use it. Balancing withdrawals is another important component of emergency fund utilization, and as a general rule, only non-discretionary expenses should be covered by the emergency fund.
The most painful part of losing a job can be losing a primary source of income. One way to balance your cash flow is to look at cutting expenses to match the temporary lost income. Consider creating a budget that categorizes spending into two categories: discretionary and non-discretionary. Discretionary expenses, also called wants, are expenses that are not necessary to daily living. Non-discretionary expenses are needs that are central to your living expenses. Think of mortgage payments, insurance premiums, and gas expenses as non-discretionary expenses, which are vital to maintaining your standard of living. Using a budgeting app can also help.
2. Refinance debt
When markets fall, often so do rates on mortgage loans. And for homeowners who can afford to spend time and money refinancing, a recession may be an opportunistic time to do so.
In early 2021, following the market drop from the COVID-19 pandemic, mortgage rates fell to a nearly 50-year low. For those who timed it right, locking down a rate in the mid-2% range became possible. Mortgage rates fell so drastically in 2021 because of low rates of inflation and emergency action by the Federal Reserve. It should be noted, however, that the high interest rate environment of today is significantly different from …….
