5 Strategies that Can Help You Prepare for the Next Downturn

By Miranda Marquit

At some point, it’s coming — a downturn.

While the stock market seems strong, the reality is that it’s been on a long bull run and is due for a drop. On top of that, economic cycles are a reality. Downturns are a natural part of the cycle.

While it’s no reason to panic, it is a good reason to make sure your finances are prepared for the next downturn. Here are a few strategies you can use to prepare for the next downturn.

1. Keep Debt to a Minimum

One of the best ways to prepare for a downturn is to keep your debt to a minimum. This is good advice in any situation, really. While some types of debt can help you move forward, it’s best to be careful. Think about your situation, and reduce your obligations before the downturn.

The last thing you need when you’re scrambling to make ends meet during a downturn is to worry about more bills. The fewer debts you have, the better positioned you’ll be.

2. Know What You Can Cut

During the good times, it’s easy to live large. You might not worry as much about fudging a bit and buying extra things or going out to dinner more. However, when another downturn is looming, it’s a good idea to review your expenses and be prepared with what you can cut out quickly.

Take a look at where your money goes each month. Prioritize your expenses, and figure out which items can be removed from your budget in a pinch. For example, if you’re eating out twice a week, you know that you can cut those expenses easily if you lose your job or you take some other financial hit in a downturn.

In fact, it might make sense to cut back now. Only eat out twice a month, and bank the savings.

3. Boost Your Savings

When it feels like a downturn is on its way, I like to increase what I set aside. Who knows if my clients will need to cut back on their work orders? Perhaps there will be some other problem that crops up.

I set aside money each month anyway, but when it feels like we’ve had a good run economically, I know it can’t last forever. I start looking for ways to put more into my savings accounts and emergency funds.

It’s a good time to give your accounts a boost so that you’re better prepared in the future. You never know what’s going to happen, and you don’t want to be in a situation that makes it worse for you personally.

4. Consider a Bucket Strategy for Your Money

One way to prepare for the next downturn is to put together a bucket strategy for your money.

With the bucket strategy, you put your money in different places, based on your financial needs. For example, you might move money you know you’ll need in the next three or four years into cash. By moving some of your money (and hopefully locking in gains from a bull market run), you can prepare with liquid cash while still leaving the bulk of your funds in the market.

Medium-term money goes in assets like bonds and dividend stocks. These might drop during a downturn, but they’re likely to begin recovering before you need the money.

Finally, money that you know you won’t need for at least 10 years can remain aggressively invested. While you’ll see losses in your portfolio during a downturn, at least it will likely recover well for the future.

With a bucket strategy, you potentially lock in some of your recent gains by selling high performers and then use the cash to get you through a downturn so you limit the number of assets you have to sell at a loss during the crash.

5. Get Ready to Hunt for Bargains

One way I prepare for a downturn is to be ready to use some of my liquidity to buy.

A lot of people panic and sell during a stock market crash. However, that’s the wrong time to sell — you’re locking in losses.

Instead, because I’ve boosted my savings in a run-up to a stock market event or downturn, I have extra cash just sitting around. I take that cash and use it to buy assets that have dramatically dropped in price.

Many companies with strong fundamentals see losses during a market crash. They’re the investments likely to recover well in the aftermath. By making purchases during the downturn, I can get a good deal and reap bigger returns down the road.

It’s never fun to go through a downturn of any kind. However, they are a part of the cycle, and inevitable. How you prepare for a downturn can make a big difference in your long-term financial fortunes.