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How to Prepare for Another Recession

NEW YORK (MainStreet) — Each month, new surveys seem to show that an increasing number of Americans are worried that another recession may be just around the corner, with one Bloomberg survey out this week showing that just 9% of the country feels confident that we won’t experience a double dip. Whether the U.S. will be hit by another recession remains to be seen, but according to some financial advisers, households would benefit by preparing for the worst now.

“We should probably all live our lives as though a recession is around the corner,” says Frank C. Boucher, a certified financial planner with Boucher Financial Planning Services. “I’m not suggesting we live like monks, but you should figure out what your financial goals are and live within your means.”

As Boucher points out, much of the reason households were so devastated by the Great Recession was simply because they had been living so far beyond their means, racking up credit card debt and signing up for mortgages on property well above their income level. In the years since the recession officially ended, many households have worked to improve their own balance sheets, but in order to withstand another economic downturn – or even just a turbulent economy – Boucher argues that consumers need to take three key steps.

Build Up Six to 12 Months of Emergency Funds

More than anything else, Boucher says households should work to build up their cash assets by placing more money in savings accounts. Just how much one should save depends on the number of income earners in the household and how stable that person believes his or her job situation to be.

If you are the sole income earner and are worried about your job security, Boucher recommends having enough emergency funds to cover one year’s worth of expenses. For households with two or more income earners, each should strive to save up to six months of emergency funds.

For years, the traditional wisdom was that one only needed three to six months’ worth of savings to make it through tough times, but as Boucher explains, “With the job market the way it is, you need to aim higher.”

Unfortunately, the majority of the country right now doesn’t even have $1,000 in emergency funds, let alone a year’s worth of money to live on.

Open Up a Home Equity Line of Credit

Prior to the recession, some Americans made the mistake of viewing their homes as a kind of cash box and taking out a line of credit on the property, which was often used to splurge on other purchases. While Boucher cautions consumers not to engage in the splurging, he does still believe there is value in a home equity line of credit, especially now.

“If you have equity in your home, I recommend you go out and get the line of credit even if you don’t end up using it,” he says. “Most banks don’t even charge for it and this becomes your super emergency fund.”

Indeed, should your personal finances take a nosedive – because of the recession or any other reason – it could quickly become much more difficult to secure a loan or line of credit, making it crucial to have one already in place.

Pay Down Your Debts

The last thing any household wants is to be saddled with large debts in a tough economy when their livelihoods may be at risk, so families should strive to cut spending now and work to pay down whatever debts they can. However, Boucher says your debt payments should depend on the state of your emergency fund.

“If you don’t have enough in savings, then I would only make the minimum payments [on your debts],” Boucher says. In this way, you can reach that savings target more quickly, and then begin paying down as much of your debts as you can.

—For a comprehensive credit report, visit the BankingMyWay.com Credit Center.

Read More:   budget & save, savings
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