How to Make Your Finances More Flexible Before the Next Recession

The U.S. economy has more or less been in expansion mode since the Great Recession of 2009, but expansions don’t last forever. While no one can say with certainty when the next recession will hit, it is certain that it will come eventually. And when it does, you’ll want to be as prepared as possible.

With that in mind, here are a couple of steps you can take to ensure your finances are secure.

Know what to prioritize

If you have student loans but you don’t have a robust savings account, Liz Weston, a personal finance expert, recommends putting any extra cash toward your savings rather than paying down low-interest debt.

“Don’t rush to pay off student loans or mortgages, especially if you have higher-rate debt or a paltry emergency fund,” she writes. “Your extra principal payments typically won’t reduce your required monthly payment, and you can’t get that money back if you need cash in an emergency.”

Your biggest goal should be to pad your savings. If you’ve been focusing heavily on investing, for example, then it might be time to scale that back and deposit some of the money into your bank account. Remember that you can’t tap into your retirement accounts for cash without incurring penalties and taxes. (Although that’s another reason to prioritize a Roth over a traditional IRA if you can, as you will be able to withdraw the contributions.)

“You should be able to leave any stock market investments alone for at least five years and preferably 10, so your portfolio has time to recover from downturns,” writes Weston.

Work on your credit score

“Lenders often get pickier during recessions,” writes Weston. “They may freeze lines of credit, close credit card accounts and make new loans harder to get.”

That’s why it’s important to work on improving your credit now, if it’s lower than you want it to be. Keep your balance low, make your payments on time and work on paying off any of the high-interest debt you may have accrued.

Here are some resources for improving your score:

  • First, know how your score is determined. The most important factor is paying off your bill on time each month, followed by how much of your credit line you’re using.
  • Then, you can use these steps to boost or build it from nothing.
  • Don’t forget to check your credit report for suspicious activity, which can wreck your score.
  • Finally, be wary of these “tricks” for increasing your score.

She also recommends keeping a backup credit card on hand so you have access to another line of credit should you absolutely need it. Only use your spare card for a few small charges each month to keep them functional, and be sure to pay off your balance each month.

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