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Most Americans will be in trouble when the next recession hits

The Motley Fool logo The Motley Fool 10/29/2018 Maurie Backman

Video by GoBankingRates

The U.S. economy is fairly predictable: It has its periods of upswings, periods of downturns, and periods of in between. It's those slumps, of course, that are particularly troublesome, especially when they come in the form of a full-fledged recession.

And make no mistake about it: Recessions are extremely common, occurring, on average, about once every 58 months. That said, it's been nearly 10 years since the Great Recession plagued the country from late 2007 through mid-2009, which means we're due for another one pretty soon. And unfortunately, most Americans are ill-prepared for that eventuality.

An estimated 49% of working adults currently live paycheck to paycheck with no savings to show for, according to data from GOBankingRates. Meanwhile, 68% have no investment strategy for a recession, and 74% aren't prepared to embark on a job search should they find themselves downsized out of an income.

Of course, there's no telling exactly when our next recession will hit, and how bad it will be. But if you don't take steps to prepare for it, you're more likely to bear its brunt.

Build an emergency fund

The risk of losing a job increases during a recession, as does the risk of losing money if you're forced to liquidate investments to cover unplanned bills. That's why it's crucial to build an emergency fund, and ideally, one with enough money to cover three to six months' worth of living expenses. Having that amount of cash in the bank will protect you from having to rack up costly debt to pay for unanticipated expenses. Just as importantly, it'll buy you some time to look for new work in the event of a layoff.

Be smart with your investments

During recessions, the stock market on a whole tends to underperform. But you can protect yourself somewhat by diversifying your holdings. This means buying stocks across a wide range of industries, as opposed to loading up on stocks within the same sector. It also means spreading your money across stocks and bonds. Buying index funds can also help you diversify. These funds are designed to track existing indexes, and investing in them basically means owning a bucket of stocks, some of which might better withstand a downturn than others.

Be job-search-ready

Because job losses become far more common during recessions, it's critical to prepare for that possibility. You can do so in a number of ways. First, boost your skills so that you're qualified to take on a wider range of responsibilities at a new role or edge out the competition for a position that's similar to yours. Next, work on building an extensive business network so that if you find yourself out of work, you'll have plenty of people to turn to for recommendations and opportunities. Finally, comb through your resume and make sure it's current so that if you do need to look for work, you won't be scrambling to put it together.

Start a side hustle

Having a side gig on top of your regular job can help you build the aforementioned emergency fund more quickly. But just as importantly, it can also buy you a degree of job security. If you end up getting let go from your main job, you'll have the option to ramp up that second one while you embark on a search. Your side hustle can be an extension of your primary job (for example, if you work full time as a graphic designer, you can also do design work privately on evenings and weekends), or it can be something totally different. The key is to secure an additional income stream for extra protection.

Though we're likely to experience a recession in the not-so-distant future, it hopefully won't be nearly as long or extreme as the last one. Still, it's essential to prepare for that eventual downturn, because if you don't have a plan in place, you could end up damaging your finances for many years to come.


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