The Federal Reserve recently downgraded the outlook for the U.S. economy. At the same time as making the announcement of the downgrade, Ben Bernanke also announced that they will be taking quantitative easing measures, beginning what has been called Operation Twist. The $400 billion program is supposed to help stimulate the economy, but there is disagreement over whether this will work. Some think that it is foolhardy, and will only encourage inflation, while others think that $400 billion isn’t nearly enough to help the economy adequately.
No matter what you think, it looks like we could very well have some rocky times ahead. As a result, now might be the time to do what you can to shore up your finances.
Build Your Emergency Fund
Now is the time to build your emergency fund. If you already have an emergency fund, you can pad it. If you don’t now is a good time to start saving money. You should have your money someplace that you can get access to it relatively quickly, as well as someplace reasonably safe. You can even create a tiered emergency fund that consists of a very liquid account that you can access immediately, as well as build up funds in other accounts. Some even like to use Roth accounts as emergency funds, or some sort of bond fund, as a secondary emergency fund. You can access your more liquid funds quickly, to hold you over until you can sell some investments to further help you.
No matter how you do your emergency fund, though, now is the time to get started. You need to prepare for what’s next, since no one really knows what that will be.
Reducing Your Debt
Another smart move during uncertain times is to reduce your debt. If you are doing well right now, it’s a good time to pay down debt so that you have fewer obligations if the economy really does tank again. Indeed, the last thing you want if your hours are cut is debt. Instead, pay down your debt and build up your emergency fund so that you are ready for what’s next. You might even start cultivating additional income — just in case. The added income not only provides you with a needed revenue stream, but it can also provide you with extra money to build up your emergency fund and pay down your debt.
In the end, it’s important to be ready for the next recession. There always seems to be one on the way.