If you didn’t learn your lesson (or were too young to be impacted), by the 2008 financial crisis, 2020-2021? Pandemic-induced financial crisis probably served as a wake-up call. Maybe you’re trying to recover from financial disaster, or perhaps you were lucky enough to escape it—this time.
But the next financial crisis could be lurking right around the corner. Whether it’s caused by another pandemic, a climate event, a war, or something we can’t even fathom yet, let’s see how to prepare for the next financial crisis before it happens.
Build or Pad an Emergency Fund
Having a three-month emergency fund is generally more than sufficient when your emergencies are things like a car repair, an appliance that needs to be replaced, or dental work that your dental insurance won’t cover (which is pretty much all dental work).
But if your work hours were drastically cut, if you lost your job, or had to close your business, three months might not be enough. It may sound drastic, but I’m now suggesting building up your emergency fund to hold nine to twelve months of expenses.
It sounds like a lot, and it is, but keep in mind that by expenses, I’m talking bare bones. Things like housing payments, groceries, auto payments, utilities, and insurances. It doesn’t include all of the things you could cut if you had to, like dinners out, gym memberships, and subscription services. It may take a long time to save up that much. That’s fine. Just make getting to whatever number that nine to twelve months of necessary expenses is for you.
Eliminate High-Interest Debt
Having high-interest debt, typically credit card debt, makes it hard to reach financial goals like creating an emergency fund, saving for a home, college, and retirement. But it’s terrifying during a financial crisis.
If you don’t have an emergency fund and disaster strikes, not only can it be hard to continue to meet even your minimum monthly payments, but you may not even have enough room on your credit cards to charge expenses if you lose your job. Relying on cards isn’t ideal, but at least it would be an option if you were debt-free.
If you don’t have any emergency funds, saving two to three months’ worth of necessary expenses should be your priority. Once you’ve done that, focus all of your efforts on getting rid of credit card debt. If your credit score is good enough, you may qualify for a balance transfer credit card or personal loan with an interest rate lower than you’re currently paying. These options will help you pay off the debt more quickly.
Even if you weren’t at all financially impacted by the events of 2020, you surely cut back on spending simply because there were many fewer options to spend money: no or fewer dinners out, vacations, shopping trips. If you were impacted, you probably cut things like cable or streaming services, grocery expenses, and beauty and clothing expenses.
All of this reduced spending didn’t make life more fun, but you probably found other ways, free ways, to have fun, and you can’t deny that your bank balance was better for it. Now, I’m not suggesting you continue living quite such a monastic life once we’re on the other side of this. I’m planning a blowout vacation as I type this! But you can continue some of these scaled-back spending habits without too significant a reduction in your quality of life.
Get A Second Income Stream
I know that people hate the term “side hustle,” but that’s what I’m talking about. Many people pivoted in 2020 to either replace the income from a reduction in hours or a job loss. Having some money coming in is better than having no money coming in.
There are hundreds of ways to make a little extra money. Mine your current career and hobbies. If you’re a graphic designer, sign up for a freelancing site like Upwork or Fivver and see if you can drum up some freelance clients. If you’re a teacher, look into tutoring online or in person.
If your hobby is cooking, put the word out to family, friends, colleagues, and sites like Facebook, Instagram, and Nextdoor that you’re available for things like delivered prepped meals or catering small events.
Get More Insurance
Covid hit people differently. Some had no symptoms at all, some were hospitalized for weeks or months, and some are “long-haulers,” still suffering from things like brain fog and a complete lack of energy months after contracting the virus.
A pandemic could cause the next financial crisis, or Covid could have a significant resurgence, and those lucky enough to escape it for the last year might not dodge the next wave should there be one. We’re all aware of how expensive medical care in America is and how it can wipe out even the most financially secure among us.
To prepare for the next financial crisis, seriously consider adding short-term disability and long-term care insurance to whatever insurance you currently have. Short-term disability is meant to fill in gaps in your income caused by an injury or illness that keeps you from working for three to six months. Short-term disability can protect your home and emergency fund.
Long-term care insurance is something to consider if you’re in your 50s or older. It covers things like in-home help with bathing, grooming, cooking, nursing home care, things that Medicare doesn’t generally cover. Long-term care insurance can help protect your retirement savings.
Stay the Course
When there is an economic crisis, people allow their emotions, namely fear, to drive their investing decisions. This is always a mistake. The market plunged dramatically in the early spring of 2020, but if you resisted the urge to panic sell, you likely made money when the year was said and done.
This isn’t exclusive to the pandemic. The plunge was steep, and the comeback was fast. Sometimes the decline is less dramatic, and the recovery takes longer. But things always come back. If you’ve worked with your CFP to make a financial plan, they have taken market downturns into account and planned for them. The plan isn’t the weak link, and neither is market volatility. You are the weak link! Stay the course come what may, and you’ll ride out the next financial crisis.
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