How will your finances fair when the next economic bust occurs? As stewards of God’s resources, we must consider such questions because the next downturn is not a matter of “if” but “when.”
What money moves can you make to help you weather the next financial downturn? Here are six ways to prepare for the next economic bust:
1. Know that these things happen.
If you have taken a basic economics class, you know the economy goes through cycles—expansion, peak, contraction, and trough. This is not to say economic downturns are insignificant. But some perspective can help you stay calm and make smart, not reactive, money decisions. Remember this—In a bull market, overconfidence causes people to make poor money decisions. In a bear market, the danger is fear. So, don’t be fearful. These things happen.
2. Get your emergency fund together.
If 2020 taught us anything financially, it was the importance of an emergency fund. Whether the economy is booming or busting, financial emergencies happen. However, I would argue that the likelihood of some specific financial challenges (job loss and income reduction) increases during economic downturns. So, make sure you have three to six months of living expenses in a saving account. Get your emergency fund together.
3. Evaluate the appropriateness of your investment portfolio.
During economic expansion, your investment portfolio can get out of balance, making it more susceptible to a downturn. Maybe, you experienced growth in a specific type of investment that now consumes a greater than planned portion of your portfolio. Maybe overconfidence kicked in and you threw additional dollars at hot investments. Whatever the reason, now is a great time to consider your investment allocation. You may need to meet with a financial advisor to help. Evaluate the appropriateness of your investment portfolio.
4. Automate your finances.
Automation helps you avoid making any irrational financial decisions. I recommend automating as much as you can—generosity, savings, investing, and paying bills. When the economy takes a downturn, you will be tempted not to give. You will be tempted not to invest. Both are big mistakes. So, go ahead—automate your finances.
5. Pay off your debt.
In point #2, I mentioned that 2020 taught us the importance of an emergency fund. 2020 also reminded us that what the Bible says about debt it true—debt is a burden. For those who experienced financial hardship in 2020, the burden of debt only increased in weight. Free yourself from the burden of debt. Use the debt snowball method to crush your debt. When the next economic bust occurs, those without debt will experience less financial stress and their generosity will not be impacted as much. Pay off your debt.
6. Consider developing a relationship with a financial professional.
I believe one of the greatest values of a financial professional occurs during economic downturns. During busts, financial professionals help people remain calm and make smart money decisions. They help individuals see the big picture, not just the bust. They can also demonstrate how a person can take advantage of a downturn instead of running from one. So, consider developing a relationship with a financial professional.
The next economic bust is not a matter of “if” but “when.” Steward the resources God has given you well by preparing for the next bust.