How to Prepare Your Real Estate For a Recession
Inflation in the U.S. economy is the highest it has been in 40 years. The Federal Reserve is planning on continuing to raise interest rates at a faster clip than it has in recent years, which is beginning to cause a bear market. While it’s doubtful that we are headed into a great depression, it is very likely that we are going into a potential recession.
Rather than focusing on the negative, it’s a great time to evaluate where you can cut, save and generate more income streams to better position yourself to withstand a financial crisis.
The good news is if you are prepared for the looming recession, you will be in a much better position and have more financial security in case of an emergency.
So, here’s how you can put a financial plan in place to prepare for the next recession that is being forecasted by economic experts worldwide.
Budgeting to Build Your Wealth
In good times or bad times, it’s important to live within your means so that you always have enough money put aside for your investment objectives as well as a worst-case scenario during hard times.
The best way to approach that goal is to have your personal finances dialed in. Your housing payments, car payments, and all discretionary spending should stay within a strict budget. Pay down high-interest credit card debt first. Research high-yield savings accounts so that you can be putting money into an emergency savings account with the objective of saving no less than 6 months’ worth of expenses. Look at getting side gigs or a side hustle to make (and save) as much extra money as possible in these uncertain times. Most importantly, and I can’t stress this enough, don’t take on any new debt to keep monthly expenses down. Only pay for what you have to pay for until the storm passes.
If you want to build generational wealth and have healthy retirement accounts, you need to be intentional about how you need to develop good money habits and forecast ways to get through any potential rough patch.
Keep Your Good Credit
Having good credit is imperative in every business cycle, particularly during economic downturns. It’s a good idea to work on your credit if you have any issues that need to be cleaned up. Your credit score can help you ride out bad times if you need an infusion of lower-interest-rate cash in a pinch. Remember, we always recommend that you utilize credit sparingly and wisely. By increasing your credit score and thereby improving your ability to access more credit if needed, you create a safety net if you need it in case of an emergency.
Start by pulling your credit reports from all 3 credit bureaus. You can get a free credit report every year, and it’s always a good idea to pull a credit report at least annually. You will want to review the report thoroughly and be on the lookout for any discrepancies or inaccurate information. Good credit is so important and is generally built over time and with diligence.
Financial experts would likely agree that having good credit and being disciplined with your spending will help you achieve your long term financial goals.
Build an Emergency Savings Fund
We touched on this earlier – you want to prioritize building up an emergency savings fund to help prepare for recession-proof To recession-proof your finances, you really need to prioritize building an emergency fund.
You want to put away as much money as possible in your emergency fund. These emergency funds should be liquid and you should have enough money saved to cover at least 6 months of expenses in the event of a job loss or other unforeseen circumstances. The goal is to eventually have a year’s worth of basic living expenses put aside.
When calculating your monthly living expenses, remember to add all of your essential expenses such as food, housing costs – including utilities, insurance, and taxes, and all transportation costs such as car payments, gas, insurance, and maintenance. If this fund is separate from your main banking account, you will be less likely to utilize it for anything other than its intended purpose – an emergency.
Diversify Investments in an Economic Downturn
As the economy becomes uncertain and unemployment rises, it’s important to make sure you have a diversified investment portfolio. So, it’s critical to make sure that your cash is liquid and is not all in one place and that your investments are allocated across different asset types.
For example, you want your stock portfolio spread across multiple industries – not concentrated in just a few. Also, if you have a real estate portfolio you might want to diversify across different asset types such as multifamily syndications or storage facilities, or medical office buildings all of which have typically done well during recessions. This ensures that a loss in value in one asset or industry doesn’t take your whole portfolio value down.
Investors panic when they see stock prices falling, but don’t make sudden, knee-jerk decisions about your portfolio without first consulting with your financial advisor. Typically, by being patient and holding steady, not making any rash decisions based on emotion, cooler heads prevail. Values tend to stabilize and return in due time.
Remember, we might be headed into a recession now, but the markets and the investors are always planning ahead for when the economy comes back.
Pay Off High-Interest Debt
With interest rates going through the roof as we speak, the last thing you want to do is have any significant debt on your credit cards. Now is a good time to pay down any credit card debt you do have because this could save you quite a bit of money from the escalating interest rates on those cards. Then take any extra money you have from paying down your debt and apply that to your emergency savings account.
It would be wise for you to pay off any credit card debt – particularly the high-interest credit cards – BEFORE you invest in any investment products. It would be unlikely that your investments would give you a better return than the debt you would owe on a high-interest-rate credit card, so you want to get that debt off your plate first.
For instance, if you have a loan or credit card debt with a 20% interest rate, it would serve you better to pay off that debt first before putting money into investments such as mutual funds or index funds, or other stock market products where the rate of return would likely be considerably lower than that. Be sure to have a plan in place to pay down the debt each month starting with the loans or credit cards with the highest interest rates. Create a budget and a payoff plan and most importantly, stick to it.
Sharpen Your Negotiation Skills
If you think you can get a better interest rate, now is the time to refinance before a recession is fully upon us. Banks generally tighten lending when the economy is in the throes of a financial crisis, so review all of your debt and see where you can save money on interest payments wherever possible. you’ve been wanting to refinance any larger assets to lower payments or secure lower rates or better terms, now is the time – not once the recession hits.
Sometimes all it takes is a call to the credit card company or to a creditor to lower your interest rates. Even if you only get a lower rate for the next year or so, every little bit will help.
Tough times may be ahead so it’s always wise to start planning now and be prepared for the unexpected so that you can stay on track with your financial goals.
Compile all your credit card statements, loan statements, and bank statements, and get your annual credit report. Then sit down, make a budget and a plan then start chipping away at that debt while building up your emergency funds and savings.
Just remember, we always recommend that you consult with your financial advisor, investment advisor, and or tax advisor before making any financial decisions.
Until next time…Earn Passively & Live Abundantly!
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