Preparing for the next recession

As the U.S. stock market continues its roller-coaster ride, invocations of the “R” word have been popping up more frequently, particularly in the financial press.

That’s “R” as in recession — a disturbing thought, considering many people are still suffering from the Great Recession that technically ended in mid-2009.

Asking if there’s going to be a recession is like asking if you are going to die. The answer to both questions is yes. The real questions are when, and what will be the cause.

Recessions are not uncommon, and whether or not another one’s fast approaching, this is a good time to consider how prepared you’ll be if another one strikes. Consider that in the past 100 years, the U.S. has counted 18 recessions, with anywhere from 10 months to 10 years in between them.

Recessions were less frequent during the past 50 years, but there were still seven recessions with an average gap of less than six years in between. The current Great Recession recovery will be seven years old in June, assuming a new recession doesn’t arrive first.

So, now there’s plenty of discussion about recession-proofing stock portfolios, and investment banks have been issuing reports weighing the risks. But most people don’t have a stock portfolio (outside of retirement accounts). So let’s talk about recession-proofing your life.

One thing we learned during the Great Recession is that the impacts of a deep economic downtown are far-reaching, regardless of the cause. Irresponsible banking practices and the bursting of the housing bubble caused countless people to lose their jobs, get furloughed, or go years without a raise, regardless of whether they themselves had a mortgage.

In other words, we saw how economic forces far beyond our control can wreak havoc on personal economic well-being. If another recession arrives, what’s your financial back-up plan? How robust are your savings, how little could you live on, and what assets might be turned into cash without having to sell at recession-depressed prices?

Now is the time to consider these questions.

During the recession, I spoke with many Charleston area residents who were in dire financial situations. Surprisingly often, they were homeowners who had some equity in their properties, meaning their home was worth more than they owed on home loans. However, due to a job loss, they were running out of money, and with no job they had little hope of turning their home equity into cash with a loan.

That’s an important lesson. Having plenty of home equity isn’t much help if you can’t pay the monthly mortgage bill.

In an economic downtown, there are few things more important than having a substantial emergency fund. Home equity, a paid-off car, a retirement fund — that’s all terrific, but those things can be difficult to quickly turn into cash in an emergency.

Maybe you have a home-equity line of credit. Banks, however, can reduce your available credit line when you may need it most.

Perhaps you have a 401(k) plan that you could borrow from in a pinch. However, if you lose your job you could face a 10 percent penalty on the funds you borrowed and hadn’t repaid.

You might even have some nonretirement money that’s invested — in stocks or real estate, for example. Of course, during a recession those assets could plunge in value, making it unattractive to cash them out.

So, what to do? I know people are besieged with advice, urging them to save more for retirement, save more for a child’s college fund, pay off debt, and so on. They say people should have up to six months of living expenses saved in an emergency fund, but who among us can set that much aside?

Here’s a way to get started: Consider the things you would do to reduce your expenses if you were suddenly forced to live on less, perhaps due to a job loss or a large unexpected expense. Then, take some of those expense-cutting steps until you have built up a solid emergency fund.

Other than paying off high-interest credit card debt, I can think of few financial steps that make more sense than having an emergency fund. A frighteningly large percentage of U.S. residents — more than half — don’t have any savings at all for emergencies.

When there’s uncertainty about the economy we can all hope for the best, but planning for the worst is the way to build financial security.