Protecting Your Finances as We Enter an Economical Shift
Is the US coming into a recession soon? Many economic experts predict a recession in late 2023 or early 2024. You should not be caught off guard. Preparing for a recession is one of the smartest decisions you can make to manage your finances well during an economic downturn.
Signals that a recession is imminent shouldn't make you panic. Recessions are part of the economic cycle of a nation, and they're bound to happen sooner or later. You can't change that; what you can influence is how you survive and thrive in such circumstances. At the end of this article, you'll have what it takes to make the best financial decisions before, during and after a recession.
6 Tips on How to Prepare for a Recession
The best strategy to beat a recession is planning and preparing for it. Here are five tips to help you prepare for and stay financially strong during a recession.
1. Build an Emergency Fund
If there's anything the pandemic has taught us, it would include that you need emergency savings for unexpected times. An emergency fund is a certain amount of money you keep for unanticipated financial emergencies. Your emergency fund should contain enough money to sustain you for at least six months.
If you're in debt, you must balance repaying the debt while saving for your emergency fund. So, you can start with an emergency fund of $1000; when you're done paying off your debt, you can increase that amount to cover your living expenses for at least six months.
2. Save Consistently
Having a saving discipline will help you in many ways, especially having something to fall back on when times are hard. The standard rule is to save 10% of your income; however, there are no hard-fast rules to saving. You can save whatever amount you're comfortable with, whether 10%, 5% or 50%!
If you need help staying on track with your savings goal, you can opt for an automatic withdrawal system that deducts a certain amount periodically from your savings account. This could be daily, weekly or monthly, depending on your cash flow.
3. Avoid Bad Investments
As much as you want your money to work for you, you must understand that investments have a risk element. Ponzi schemes and other investments become increasingly popular during an economic downturn. Even legit investments tend to perform poorly during bad economic periods.
You should soft-pedal on investing during a recession and aim to preserve your money. However, if you're willing to take the risk, most assets are usually cheap during the bear market in recessions. You can buy these assets when their prices are low and sell when the economy improves and their costs increase.
4. Manage Your Debts
If you have debt payments to make, you should make it a priority to pay them off. Do whatever you can to make at least the minimum payment consistently. The more you delay, the higher you'll have to pay, and the more your credit score suffers a hit.
However, some debt payments require more urgency than others. For example, you should prioritize credit card loans with higher interest rates than low-interest debts like mortgage and auto loans. Understanding the type of loan you're paying off will help you decide which requires the most attention in a recession.
5. Have a Spending Plan
In the weeks or months leading to a recession, you need to cut down on certain expenses and focus on essentials. The four most critical living necessities are food, utilities, transportation and housing. Set a monthly budget for how much you want to spend on these essentials.
Also, make sure to add a miscellaneous category to cover unexpected expenses. During a recession, you should track your expenses. Knowing where your money is going will help you determine if you're spending on the right things or if you're spending the right amount on necessary expenses.
6. Set Income Safety Measures
If you need more money to cover your expenses and pay off debts, consider having an additional income stream. Job security in a recession is not guaranteed, as many companies will only make enough revenue to support their operations if they downsize. You can avoid the negative consequences of such an occurrence by taking proactive measures to have multiple income streams.
You can take up a side hustle to work on in your free time. In addition, always be job-ready. Keep your resume updated, focus on networking and put yourself out there. This is especially important if you work in a field vulnerable to layoffs during an economic downturn.
What Not to Do in a Recession
- Co-signing a loan: if the borrower doesn't pay up as agreed, you'll be required to make the payments.
- Taking up new debts: Taking on debts when the economy is down should only be a matter of last resort; you should consider taking on a side hustle to make money instead.
- Getting an adjustable-rate mortgage: Although their rates will fall in a recession, they rapidly rise when the economy recovers, so you have to spend more to pay down the debt.
The Bottom Line
Being recession-proof doesn't happen by accident; it requires adequate preparation. Although it's difficult to predict when a recession will occur, how long it'll last and the scale of its economic impact, you can shield yourself by taking proactive steps. These steps include having an emergency fund, saving consistently, getting a side hustle when needed, avoiding bad investments that may eat deep into your money, committing to a strict spending plan and managing your debt effectively. Recessions are not a time to panic. Once you've secured your finances and lifestyle, you can rest assured you'll make it through the thick and thin.