Market volatility, debt ceiling default and impending financial doom continue to dominate the headlines of major news outlets as they have for the past year. Most so called “experts” predict at some point in 2023, the United States economy will dip in to a recession. The general definition of a recession is a fall in Gross Domestic Product (“GDP”) in two successive quarters, but there are also other factors that economists look to before officially declaring a recession.
The timing of a recession is difficult to predict so it is best to be prepared for one before it hits. Below are a handful of tips to help you prepare your finances for the next recession, whether that be in 2023 or in the future.
- Inspect your budget. Personal financial planning does not have to be complex or complicated. One of the easiest methods to ensure long-term financial success is to craft your budget with cash inflows exceeding cash outflows. Realizing positive discretionary cash flow will allow you to increase your savings, pay off debt and invest for the future. If pen and paper or an Excel spreadsheet do not work for you, there are many smart phone apps or online budget tools such as Quicken or Mint that will help you prepare a budget. Analyze your spending for a few months to determine where your money is being spent and if any changes are necessary.
- Beef up your emergency savings. Your budget is crafted, your spending has been adjusted and you are now cash flow positive. It is time to beef up your emergency savings. The general rule of thumb is to maintain 3 to 6 months’ worth of living expenses in savings. Like most rules of thumb, this really serves as a good starting point. The appropriate balance for your savings account will depend on factors that are unique to you such as your budget, other streams of income and number of dependents. Your budget and financial plan serve as two great resources that will help determine the right amount that you should keep in savings.
- Pay off high interest debt. By paying off your debt, you will be increasing the amount of positive cash flow for your monthly budget. I am reminded of a young couple who became clients of our firm about 5 years ago. They were both young pharmacists who had just graduated from college and were looking to get rid of the large debt burden they had, mostly in the form of student loan debt. One of our advisors worked with them to prepare a budget and identified that they had strong, positive cash flow. She worked with them to increase their emergency fund and then to aggressively pay down their debt. The end result was a plan for the clients to pay off over $100,000 of student loan debt in just under two years. Talk about huge lifetime savings by not paying decades worth of interest!
This is just one of many stories I could share about the impacts of the three simple tips shared above. These are the same initial steps our firm takes with almost all new clients who hire us for financial planning services. While we do not know when the next recession or economic downturn will hit, it is never too late to work to prepare your finances to weather the next storm.
Published in the Victoria Advocate
Kyle W. Noack CPA/CFP® is Chief Executive Officer of Keller & Associates CPAs, PLLC and KMH Wealth Management, LLC.