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How to prepare your finances for a recession?

According to a recent poll, about 6 in 10 Americans feel that we’ll be in a recession by this time next year. Of course, there’s no way to predict the future or know where we’ll 12 months down the line. But that doesn’t mean that you can’t (or that you shouldn’t) start preparing your finances for a recession.

A recession can result in fewer new job opportunities and job eliminations, so it’s crucial to plan ahead…just in case. Here are five ways to prepare your finances for a recession.

1. Beef up your emergency fund to prepare for a recession

If you haven’t made saving a priority, or if your emergency fund needs some help, now’s the time to get serious and build a bigger cash reserve.

Cash can provide some protection in the event of a job loss or pay cut. Even if you qualify for unemployment compensation, what you receive will probably be far less than what you actually need.

The general recommendation is to maintain a minimum 3 to 6 months of living expenses in an emergency fund, but you can take it a step further. If you’re in a position, you might save 12 months of living expenses. A sizable emergency fund means you’re less likely to rely on a credit card in a pinch.

2. Pay down high-interest debt

I recently read that about 22% of people have more in credit card debt than they have in savings. If you have a lot of debt, you can prepare your finances for a recession by tackling these balances…sooner rather than later.

Interest rates typically decline in a recession to encourage spending. Even so, some credit card rates will likely remain in the double digits, which is costly if you carry a balance from month to month. As you pay down your credit cards, one option is to eliminate high-interest debt first. This can save money in the long run.

But what if you have debt and “no savings?” Which should you focus on first? One approach is splitting your extra money between both efforts. If you have $500 a month for either savings or debt repayment, put $250 toward savings and $250 toward your high-interest debt.

3. Financially prepare by eliminating expenses

Now’s the time to “really” assess where your money goes, and to become more intentional with your spending. The truth is, the more expenses you eliminate, the easier it’ll be to save and/or pay off debt.

This doesn’t mean you have to cut out everything you enjoy – it doesn’t have to be all business and no play. However, you should be willing to make some sacrifices, and you might consider delaying large purchases.

Cutting back is a key way to financially prepare for a recession and increase your savings rate, which is the percentage of your income that you don’t spend. A higher savings rate means you’re able to hit financial goals faster. Areas to eliminate or trim expenses include:

• entertainment
• recreation
• monthly subscriptions
• memberships
• conveniences
• excessive eating out
• frequentl trips for pleasure

But don’t just cut back…actually save your savings.

4. Don’t upgrade your lifestyle

If possible, keep your lifestyle the same or downsize to a more frugal lifestyle. Signs that you “might” be living above your means include housing exceeding 30% of your monthly gross income, using credit as an extension of your income, lack of a budget, and saving less than 5% of your income.

Again, financially preparing for a recession relies heavily on increasing your savings rate. And for a lot of people, housing and auto loans are their two biggest expenses. Lowering these costs might put hundreds back into your pocket each month.

Granted, moving into a cheaper place isn’t always an option depending on where you live. But sometimes it is, so get familiar with your local real estate. Is it possible to move into a smaller, cheaper place (especially if a large percentage of your income goes to housing)?

5. Increase your income to financially prepare for a recession

The job market can get competitive in a slowed economy, and some companies might experience layoffs. Therefore, mentally prepare for the possibility of seeking new employment.

If you feel your current job is unstable (or that your position is on the chopping block), use this time to enhance your job skills or receive education and training in a completely different field (perhaps a “recession-proof” field, and preferably one that earns more than your current job). A higher income can provide additional money for debt repayment and savings.

Bottom line: Dust off your resume and freshen it up…just in case. And in the meantime, consider supplementing with another source of income. Nowadays there are so many ways to pad your cushion. 

Did you find this information helpful, or got a question about financially preparing for a recession? Let us know ↓↓