When’s the Next Financial Crisis Coming — and How Do You Prepare?

A decade has passed since the height of the last major financial crisis. And if you have a pessimistic — or practical — mindset, you know that Americans are due for another money meltdown in the future.

Today’s economy looks different than it did 10 years ago. The U.S. stock market has experienced the longest bull market in history. The unemployment rate is low, and consumer confidence is up.

But what goes up must come down, and crises tend to take place at or soon after a cyclical peak in the economy and during periods of overconfidence, says Robert Bruner, professor and dean emeritus at the University of Virginia Darden School of Business. “I’ll begin with the proposition that we are terrible at forecasting crises,” he says. He adds, “I would say that we will never prevent financial crises in the future, despite the best efforts and the hopefully competent work of regulators, bank CEOs and the like.”

While a financial meltdown might not kick off tomorrow or be as intense as the Great Recession, we should still be prepared. “I’m suggesting that individuals and, I would say, companies and government units, should manage their affairs in ways to anticipate a downturn and provide for resources to tide them over,” Bruner says.

[See: Dear Younger Me — 12 Financial Truths We Wish We Knew Earlier.]

So if a financial crisis, or at least a bear market, is possible in the near future, how do you protect your finances?

“It’s all about where someone is in their life stage,” says Ed Chairvolotti, CEO of Chairvolotti Financial in Winter Park, Florida. To be prepared, Chairvolotti recommends that individuals adopt or maintain money management best practices.

For his clients, good money management includes divvying up funds into three buckets: a short-term emergency fund, retirement savings and midterm lifestyle savings, such as a vacation fund. “If people focus on those three buckets of money, they’ll be able to weather any type of crisis,” he says. “We always have to be prepared today, regardless of what’s happening in the market.”

Bruner agrees that good financial housekeeping is key to surviving an economic downturn. “The best thing that an individual or a household can do is to manage finances very prudently,” he says. “That means: Don’t take out more debt than you can honor in adverse circumstances, pay down credit, especially credit card debt … save 10 to 15 percent of your paycheck and keep a rainy day fund of liquid, safe funds somewhere in a good place, with a good institution, that is stable and that you can trust.”

[See: Basic Money Lessons You (Probably) Missed in High School.]

Aside from maintaining good financial habits, individuals can make various moves to shore up their financial safety net and prepare for the next downturn. “The first thing I would do to prepare for any onslaught is to get out of debt,” says Dennis Nolte, certified financial planner and vice president at Seacoast Investment Services in Winter Park, Florida.

That means paying down debt and securing a fixed interest rate on variable-rate loans. “If you’ve got a variable-rate anything, I’d fix it now. Even if the economy stagnates, rates will probably creep up,” Nolte says.

While it likely means missing out on higher returns in the interim, moving money toward more conservative investments can give worried investors more peace of mind as they await the next market downturn. Conservative investors can move assets to guaranteed products, such as certificates of deposit or treasuries, Nolte says. Again, how you anticipate a future financial crisis and the investment moves you make will depend on your age and tolerance for risk.

If you have a Roth IRA, consider positioning the underlying investments a little more conservatively so you can pull the principal out (without paying additional taxes or penalties) if you need cash quickly, he says.

[See: 10 Tips for Couples and Young Families to Build Wealth.]

Don’t neglect to protect and nurture your ability to earn money, even in a lousy economy. “The most valuable asset anyone has is what is between their ears,” Bruner says. “This is especially true for young people. Keeping your skills sharp and your employability very high is the No. 1 protection against economic adversity.”

If a financial crisis could imperil your ability to earn a paycheck, now’s the time to start working on your attractiveness as an employee. You may need to start picking up the pace at work, moving to a more stable company or industry or even earning additional professional certifications.

If you choose to go back to school, however, select your educational institution carefully. “Be a very, very wary shopper of educational services,” Bruner says. Low-cost community colleges or public universities typically serve students better than high-cost, for-profit institutions, but you’ll need to do your research to determine the best match for you. Bonus points if you can use a company education reimbursement benefit to make additional educational training low-cost or even free. “Make your company — while you’re employed, while the economy is OK — pay your tuition for the next job,” Nolte says.

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When’s the Next Financial Crisis Coming — and How Do You Prepare? originally appeared on usnews.com