Backman, Maurie (for the Motley Fool)
Key words and Definitions
Financial plan – a comprehensive plan of a person’s current financial position, future financial goals and steps that should be taken to accomplish those goals.
Liquidity – convertibility to cash within a short period of time.
Emergency reserve fund – a sum of money set aside to cover unexpected financial needs.
Summary: Key Points in the Article
A recent study conducted by the Nationwide Retirement Institute indicates that most older Americans expect a recession in the next five years. Given that recessions are inevitable there are some financial steps you can take to prepare for the next recession. The steps are:
1) Create an emergency reserve fund with six months of living expenses set aside. This fund keeps you from liquidating investments when the markets are down and protects you in the event of job loss. This is often called a rainy day fund.
2) Diversity your investments into multiple assets classes. When one asset class is down others will be up and smooth your returns.
3) Get a second job to diversify your income. This second job is often called a side hustle.
4) Lower your fixed costs so you can survive on a lower income.
Thinking Critically Questions
1. Why is a rainy day fund important?
2. Why is diversifying your investments important?
3. Why do some financial planners recommend a “side hustle?”
Multiple Choice Questions
1. A is a decline in the nation’s output.
b. quantitative easing
d. all of these
2. Experts recommend keeping worth of living expenses in an emergency reserve fund.
a. 6 months
b. 18 months
c. 12 months
d. none of these
3. One recommendation to survive a recession is to;
a. buy things now that you might need later
b. lower your fixed costs now
c. increase your higher risk investments
d. none of these