(StatePoint) With speculation swirling that the U.S. economy is heading for another recession, you might be wondering what you can do to protect yourself from feeling the pinch of a slowing economy.
Experts agree that proactive and prudent financial planning is key to avoiding emotion-driven decisions and maintaining a long-term orientation during times of turmoil. Those who already have a financial plan should take the time to re-evaluate its goals and strategies to ensure it can withstand a dramatic market decline. If you do not have a financial plan yet, take the initiative to start putting one together. A Certified Financial Planner (CFP) professional can provide you with guidance on creating and maintaining a comprehensive financial plan.
Here are five reasons why you need a financial plan in place before a recession:
• Know Where Your Finances Stand. When markets are in turmoil and you are feeling scared, your personal situation should guide your decisions. The first step in developing a financial plan is to figure out where you stand, which includes getting a thorough understanding of your cash reserves, consumer debt and current retirement contribution level and savings.
• Balance Fear and Greed. Bull markets can make investors more hopeful that gains are perennial, leading them to assume too much risk. Conversely, when the market drops, fear takes over and makes them want to sell everything. A financial plan helps you to avoid impulsive actions and balance market highs and lows.
• Manage Your Cash. A sound financial plan ensures that you do not put money you know you will need in the short term at risk. Money you anticipate needing within a year or so should be kept in a safe place, like a checking, savings or money market account, a short-term Certificate of Deposit (CD) or a bond.
• Maintain a Diversified Portfolio. One of the best ways to prevent emotional swings is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities.
• Take a Break from the Bad News. Once you have assessed your personal situation and made some choices, it’s smart to tune out from the constant news coverage. The drumbeat of bad news can lead to a cycle of negative thoughts, like “I am never getting this money back,” or “I will never retire.” Psychologists say such thoughts can distort reality, disrupt thinking and erode performance.
To find a CFP professional who can help you prepare a financial plan, visit letsmakeaplan.org.
However dire a crisis may seem, having a long-term financial strategy will keep you on track to achieve your financial goals.
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