Arising from problems like geopolitical strife, J.P. Morgan has reported that the chance of an economic recession in the United States in 2025 is around 40%. Although this represents a decline from previous estimates, which were closer to 60%, it is still a higher figure than most Americans would be comfortable with.
The possibility of an upcoming recession has left many wondering how they can build long-term financial security in the face of this uncertainty. To build long-term financial security, we must first understand what it means.
“The core of financial security is feeling comfortable affording your regular expenses,” explains Lucas Barcelo, founder of Thrivin’ Life, a leading life insurance agency. “For that security to be long-term, one must feel comfortable with their expenses for a period of several months, regardless of the financial circumstances and obstacles that may arise. This feeling can be difficult to achieve in times of economic uncertainty.”
Understanding the nature of economic downturns
While it may seem like the economic outlook is dire, it’s essential to remember that the financial world is cyclical. There are ups and downs — in that exact order — and we have seen these play out time and time again throughout history.
For example, following the 2008 financial crisis, the economy experienced a recovery period in the mid-2010s, bringing it back into order. Even the Great Depression, which is typically considered the most prolonged and severe financial downturn in history, was followed by a period of economic prosperity spurred by the industrial demands of World War II.
“Once we understand the cyclical nature of the economy, we will begin to realize that whatever ‘trend’ we are experiencing in any given moment — whether positive or negative — will not last forever,” explains Barcelo. “With this knowledge, you can better prepare for the incoming waves. When times are good, take advantage of the opportunity this provides; when conditions are unfavorable, know that all you have to do is weather through till the next upturn.”
Diversification to build financial security
One of the biggest mistakes people make during an economic downturn is panicking and selling off their assets immediately. If you sell during a drop, you essentially lock in losses. If you wait it out, knowing that the economic downturn will eventually end, you may incur smaller losses, if any at all.
To avoid panic selling, it’s best to diversify your portfolio so you don’t feel significant pressure when a single asset’s value drops significantly. Remember, you’ll have the rest of the assets in your portfolio as a hedge against that instability.
On the other end of the spectrum, don’t impulsively buy stocks during a dip or a gain. Unless you are a professional trader, financial experts warn against trying to play the market. The truth of the matter is that even some of the most experienced traders fail when they attempt to beat the market. The more reliable approach is to invest consistently.
Decide how much you want to invest from each paycheck and stick to it, regardless of the state of the economy. If you invest the same amount in up and down months, you may not experience dramatic gains, but you can also avoid more dramatic losses.
Building a nest egg to create financial security
According to Barcelo, a key strategy for achieving long-term financial stability and better navigating the financial challenges associated with economic downturns is to build a nest egg. A nest egg consists of a few different elements.
First, you should have an adequate emergency fund. This fund can be used to cover unexpected expenses, such as emergency home or car repairs, medical bills, loss of employment, or similar unforeseen costs. You should keep this money in a savings account that is easily accessible — don’t tie this money up in investments, as you may need to access it quickly. A good rule of thumb is to build an emergency fund of three to six months’ worth of expenses, and more if you are retired.
Another aspect of a nest egg is serving as a hedge against inflation, which can cause the cost of living to rise dramatically in a short period. We have seen it with everyday necessities like gasoline and eggs — prices can change dramatically, sometimes overnight — yet most people typically receive a cost-of-living increase to their salary only once a year. What do you do in the meantime, as inflation causes your expenses to increase, but you don’t have more money coming in?
