The World Bank declared last month that a potential recession could be right around the corner. The U.S. is showing signs of economic weakness, with thousands of job cuts already announced by some of the largest corporations in America and inflation still driving costs out of control. This could lead to a recession like the economic crisis of 2008.
The best thing any of us can do is to be prepared and secure our finances as early as possible.
#1 Maintain a Level Head
To protect your finances during a recession, it is crucial to maintain a level head. Recessions are a regular aspect of the economy, and it is important to understand that they are temporary. Think of it like the changing seasons – winter follows summer, with falling leaves and shorter days. This is simply part of the progression and should not cause alarm. You can make sound decisions for your future by remaining calm and centered.
Staying calm and taking care of your mental health while preparing for a recession can be accomplished through several methods:
- Educate yourself: Gaining knowledge about the current economic situation and what steps you can take can help reduce anxiety.
- Stay informed: Stay up-to-date on the latest news and developments, but also limit your exposure to negative news and information overload.
- Prioritize self-care: Make time for activities that bring you joy and relaxation, such as exercise, reading, or spending time with loved ones.
- Practice mindfulness: Focus on the present moment and use mindfulness techniques, such as meditation or deep breathing, to manage stress and anxiety.
- Seek support: Reach out to friends, family, or a mental health professional for support and guidance.
By incorporating these strategies, you can create a plan for your finances during a recession while also taking care of your mental well-being.
Related Article: Recession-Proof Stocks – 13 Stocks to Buy to Weather the Storm
#2 Revisit Your Emergency Fund
An emergency fund is essential when planning for a recession because it provides financial security in case of unexpected events such as job loss or medical expenses. An emergency fund can help reduce stress and provide peace of mind during difficult times.
To create an emergency fund, you can follow these steps:
- Determine your target amount: Decide how much money you want to save in your emergency fund. Typically three to six months’ worth of living expenses is a good starting point.
- Make a budget: Identify areas where you can reduce your expenses to make room for saving.
- Automate your savings: Set up automatic transfers from your checking account to your emergency fund account each month to make saving a habit.
- Avoid dipping into the fund: Use your emergency fund only for unexpected emergencies, not impulse purchases.
- Gradually build the fund: As your financial situation improves, consider increasing your savings to reach your target amount.
By creating an emergency fund, you are taking a proactive step towards protecting yourself during a recession and ensuring that you have a financial safety net in case of unexpected events.
Related Article: Here are 23 of the Best Recession Proof Jobs
#3 Pay Off High-Interest Debts
Prioritizing eliminating debt, particularly high-interest debt such as credit cards, is essential to protecting your financial security during a recession. Paying off high-interest debt before a recession is important for several reasons:
- Reduces monthly expenses: High-interest debt can burden your finances, reducing the amount of money you have available for other expenses each month.
- Improves financial stability: Less debt frees up more of your income and reduces the risk of financial strain in case of a job loss or other financial setback.
- Increases credit score: Paying off debt can improve your credit score, making it easier to access loans or other forms of credit if needed in the future.
To pay off high-interest debt, you can follow these steps:
- Make a list of all debts: Write down all of your debts, including the creditor, balance, interest rate, and minimum monthly payment.
- Prioritize debts: First, focus on paying off the debt with the highest interest rate.
- Make a budget: Identify areas where you can reduce your expenses to allocate more money towards debt repayment.
- Increase payments: Pay more than the minimum monthly payment on your highest-interest debt.
- Avoid incurring new debt: Avoid taking on new debt while you are paying off your existing debt.
By paying off high-interest debt, you can improve your financial stability and reduce the risk of financial strain during a recession.
#4 Create Two Budgets
Creating a budget may not be the most exciting task, but it is necessary. Creating a budget is a crucial step in preparing for a recession and can help you better manage your finances. Here are steps to create a budget:
- Track your spending: Write down all of your monthly expenses to get a clear picture of where your money is going.
- Categorize expenses: Divide your expenses into categories such as housing, food, transportation, and entertainment.
- Identify areas for improvement: Look for areas where you can reduce your spending and allocate more money towards savings or debt repayment.
- Set a budget: Based on your expenses and areas for improvement, set a budget for each spending category.
- Stick to the budget: Try to stick to your budget as closely as possible and adjust it as needed.
Many apps are available to help you manage your budget and track your spending, including
- Mint: A comprehensive budgeting app that links to your bank accounts and categorizes your spending automatically.
- Personal Capital: A budgeting app that tracks your spending and provides investment tracking and retirement planning tools.
- You Need a Budget (YNAB): A budgeting app that focuses on helping you live within your means and reach your financial goals.
- PocketGuard: A budgeting app that shows you exactly how much money you have left to spend after bills and savings are taken into account.
Using one of these apps or following the steps outlined above, you can create a budget that helps you prepare for a recession and manage your finances more effectively.
#5 Rebalance Your Portfolio For Safety
It is advisable to keep at least 40 percent of your money in cash equivalents such as money markets, CDs, and short-term and immediate-term bonds. The remaining funds should be invested in stocks in order to generate returns. If you are younger and have a longer-term outlook, you may wish to consider dollar cost-averaging through the recession. This strategy involves buying stocks during both the up and down cycles, which can help you to increase your overall investments. It is important to stay focused on your long-term financial goals and not be swayed by short-term economic conditions.
#6 Safeguard Your Retirement
Keep investing in your retirement, even during a recession. Don’t cease contributing to a 401(k) or IRA, even if it feels like everyone is panicking. Consider consulting with a financial planner to ensure your retirement strategy is in a good place. If you are close to retiring, contact your HR department to learn how your money is invested and if any adjustments can be made to ensure your funds are in safe, low-yield investments.
If you are near retirement and have a 401k, moving some of your money into bonds may be a good idea. If retirement is just around the corner, having all your investments in equities is not ideal if the stock market takes a short-term dip. This is because you may need to access your funds soon to fund retirement. Moving some of your money into bonds may be the most appropriate strategy.
#7 Start a Side Hustle
Having a side hustle can be a proactive step towards preparing for a recession and improving your financial stability. It can also provide opportunities for personal and professional growth and development.
- Provides a secondary source of income: A side hustle can provide additional income to help offset the impact of a potential job loss or reduction in hours.
- Increases financial stability: Having a secondary source of income can help improve financial stability and reduce the risk of financial strain during a recession.
- Increases job security: By having a side hustle, you are less reliant on a single source of income, making it easier to weather a potential job loss or reduction in hours.
- Develops new skills: Starting a side hustle can provide an opportunity to learn new skills and gain valuable experience in a new area.
- Increases earning potential: A successful side hustle can lead to a full-time business or a significant increase in your overall earning potential.
Creating additional revenue sources, such as ride-sharing, freelancing, babysitting, online sales, and temporary retail jobs (especially when seasonal workers are needed), can help build up your savings. A steady part-time job could enable you to quickly build an emergency fund and provide a reliable source of income if you lose your regular job during an economic downturn.
#8 Safeguard Your Job
The Great Recession caused widespread job losses, with various industries suffering negative consequences. There has been a bloodbath in Tech already, with thousands of jobs eliminated by Google, Microsoft, Adobe, Amazon, and others.
Here are some steps you can take to reduce the risk of losing your job during a recession:
- Stay informed: Stay up-to-date on industry and company news, and be aware of potential threats to your job security.
- Build relationships: Build strong relationships with your co-workers and superiors, and demonstrate your value to the company.
- Expand your skill set: Consider taking courses or training programs to develop new skills and add value to your job.
- Be flexible: Be open to taking on new responsibilities and adapting to changes in the workplace.
- Be proactive: Identify areas where you can improve your performance and proactively address any weaknesses.
- Be positive and solution-oriented: Maintain a positive and solution-focused attitude, and be proactive in finding ways to help your company succeed.
- Consider alternative options: As we mentioned, consider freelance or consulting work or starting a side hustle as a backup plan in case of a job loss.
#9 Seek Help
If you are feeling the strain of a financial downturn, there is no shame in seeking help from a financial professional. In the same way you would see a doctor if you were sick, a financial adviser can help you manage stress and develop a plan to get your finances back in order.
Seeking the help of a financial planner can be beneficial when planning for a recession for several reasons:
- Professional expertise: Financial planners have the training and experience to help you navigate complex financial decisions and provide guidance on how to prepare for a recession.
- Comprehensive planning: Financial planners can help you create a comprehensive financial plan that takes into account your unique situation, goals, and risk tolerance.
- Access to resources: Financial planners have access to a range of financial tools and resources that can help you plan for a recession and make informed decisions.
- Objectivity: A financial planner can provide objective advice and recommendations that are not influenced by emotions or biases.
- Accountable: Working with a financial planner holds you accountable for your financial goals and helps you stay on track with your plan.
- Customized advice: Financial planners can provide customized advice that considers your financial situation, goals, and risk tolerance.
By seeking the help of a financial planner, you can get professional support in preparing for a recession and make informed decisions that can help you achieve your financial goals.
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