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How to prepare your finances for a recession?

As uncertainty looms over the possibility of a recession, it’s essential to take proactive steps to safeguard your financial well-being.

Even though we can’t predict the future, we can prepare for it. So here are five practical strategies to recession-proof your money, which can help you navigate economic challenges successfully.

1. Beef up your emergency fund

Whether you’ve ignored saving money or your emergency fund needs a boost, now’s the perfect time to get serious about building up your cash reserves.

Having a substantial emergency fund can provide a safety net in case of unexpected events like job loss or a pay cut. Even if you qualify for unemployment benefits after a layoff, the money you receive might not cover all your expenses.

The general recommendation is to have a minimum of 3 to 6 months’ worth of living expenses saved up. However, if you’re in a position to do so, you can definitely aim for a more substantial fund, maybe 12 months of living expenses.

The major perk of having a sizable emergency fund is that it reduces the likelihood of relying on credit cards when you’re in a tight spot.

2. Pay down high-interest debt

Now’s also a great time to address your credit card debt, especially since approximately 22% of people have more in credit card debt than savings, according to Bankrate.com. 

During a recession, interest rates generally decrease to encourage spending. However, your credit card rates may likely remain in the double digits, which can be quite costly if you carry a balance from month to month.

For this reason, you might focus on eliminating your highest interest debt first. This can free up extra money in your budget, which you can use for saving and other essential expenses.

If you’re in a situation where you have debt AND no savings, a good strategy is to split available funds between both efforts. For example, if you have $500 per month to either save or repay debt, consider dividing it evenly and putting $250 towards savings and $250 towards paying off your high-interest debt.

3. Eliminate unnecessary expenses

To effectively pay off debt and save money, it’s also important to eliminate unnecessary expenses from your budget. Therefore, this is the perfect time to evaluate your financial goals, prioritize, and adopt a more intentional approach to spending.

Keep in mind that cutting expenses doesn’t mean eliminating all the things you enjoy. It’s about finding a balance. So instead of eating out six days a week, maybe scale back to one or two days. 

Reducing expenses will help increase your savings rate, which refers to the percentage of your income that you don’t spend. By saving more, you’re able to reach your goals more quickly.

To cut back on expenses, consider trimming your entertainment or recreation budget, cancelling unnecessary monthly subscriptions or memberships, and possibly giving up certain conveniences. However, it’s not just about cutting back; make sure you “actually save the money you save” from these reductions.

4. Don’t upgrade your lifestyle

If you can, aim to maintain your current lifestyle and live within your means. And if you’re currently living beyond your means, consider downsizing to a more frugal lifestyle.

Again, the key is to increase your savings rate. Housing and auto loans are often the largest monthly expenses for many people. By reducing these costs, you can potentially free up hundreds of dollars in your monthly budget.

Therefore, take time to familiarize yourself with the local real estate market. Depending on where you live, there might be options for cheaper housing.

5. Increase your income

Recessions can trigger layoffs, so mentally prepare for the possibility of reentering the job market.

If you feel that your current job is unstable, it might be worth getting additional training for a recession-proof job – just in case. Now’s also the time to update and polish your resume. And in the meantime, explore opportunities to earn extra income.

With so many ways to make money nowadays, you can possible work from home in your spare time or generate cash with a passive income stream.