When the economy starts flashing warning signs, it’s easy to hope for the best — and money expert Clark Howard says you should. But he also wants you to “prepare for the worst inside the four walls of your own financial life.”
Even though recessions are a normal part of capitalism, Clark says they can still take many by surprise. “You go through periods of overly exuberant expansion, followed by accumulations of debt, and then other external factors will lead to a recession, which is basically the economy goes into the dumps.”
According to a recent report from Moody’s, 22 states are already in or near a recession, and those states represent a large share of the nation’s population. Clark says that doesn’t mean a nationwide downturn is certain, but it’s a reminder to check your financial footing now.
“If we don’t have one and you’ve used this early warning as a time to get your finances ship shape, awesome, because you’re going to be better off even if we don’t have a recession.”
So what should you do to prepare if you suddenly lose your job or your company shuts down? Clark says there are two big priorities to focus on.
Tackle Lifestyle Debt
Clark says too many Americans are carrying “a very high level of debt right now,” much of it what he calls lifestyle debt. “It’s anything that would be considered to be lifestyle debt, which is credit cards, personal loans, pay-in-fours, and I’m going to make you cringe, vehicle loans.”
While a mortgage isn’t considered lifestyle debt, Clark wants you to take a hard look at your balances on everything else. “Do you have a plan to curtail the amount of debt you have in your life? Do you have a plan to pay off the debt you have in your life?”
He recommends facing those numbers head-on and doing it the old-fashioned way. “If you’re carrying a lot of debt, you write it down. Do not use a computer screen for this; use a pencil and paper. So it’s staring you right in the face.”
Once you’ve written down what you owe and the interest rates, you can set a plan. Clark also suggests using a budgeting tool to get your spending under control. “It forces people who are carrying a lot of debt to really think through what they’re spending.”
Build Financial Reserves
The next step is to think about what would happen if your paycheck suddenly stopped. “If out of nowhere you got laid off, what are you going to live on? Have you thought about that? What’s your plan B?”
Clark says building a cash cushion — even if it starts small — is critical to surviving a layoff or recession. “You face it now, prepare now, you improve your finances now, and the net result is you’re in a better position, better situation, no matter what, recession or not.”
Bottom line: You can’t control whether the economy dips into a recession, but you can control how prepared you are for it. As Clark puts it, “Hope for the best but prepare for the worst.”
