All the news I am seeing suggests that our economy may be approaching a recession (or even in one already!). I’m worried about what this means for my finances and I’m wondering what steps I should take now. How can I prepare for a recession?
Economists are divided on whether we’re already in a recession or likely heading toward one. All signs seem to be pointing towards a recession: inflation has hit a 40-year high, interest rates have hit a two-decade peak and investing in the stock market now is like riding a terrifying roller coaster.
Taking steps to improve your financial health in case of a recession is a responsible and forward-thinking move. Here’s how to be in position for weathering a recession.
Take stock of your financial reality
Before you actually make any financial changes, ask yourself these questions:
- Am I making it through the month, meeting all my expenses and putting some money into savings?
- What is my total monthly income?
- What is the total of my monthly expenses?
- What is the total of my outstanding debt?
- How much money do I have in savings?
- How much liquid funds do I have?
- Do I have any major and expensive life events coming up in the next year, such as a wedding, the birth of a new baby or a household move?
Build up your emergency fund
If you don’t already have a well-padded emergency fund, now’s the time to work on building one up. Ideally, an emergency fund should have enough funds to keep you afloat through three-to-six months without any income.
Having this money set aside in case of an emergency, or unexpected financial stress, can help you avoid getting tangled up in a cycle of debt or even losing your home or car. Pinch pennies wherever you can to get that fund ready for a recession. It may be challenging now, but the security of having money safely tucked away to get you through difficult financial times will be more than worth the struggle.
Diversify your investments
With stock market fluctuations expected to be more extreme and to happen more often during a recession, it’s crucial to keep your investments diversified. Make sure your investments are not all tied up in one asset or asset class so that a poor-performing investment won’t bring down your entire portfolio. Mutual funds and index funds both provide a great way to keep your portfolio diversified.
Get rid of high-interest debt
It’s never a good idea to hold onto high-interest debt. In a rising-rates environment, such as that of a recession, this monthly bill can increase significantly. If you have one or more outstanding credit card balances, work on consolidating the debt by moving the balance to a personal/unsecured loan. You can also transfer the debt to a new credit card that features no interest, or a low interest rate. Just be aware that many of these deals are promotional, short-term offers. When the introductory period ends, you’ll be hit with interest rates that may be even higher than the rate you are paying now (so be prepared to transfer again if you don’t pay it off in full before that intro period concludes).
Stick to a budget
This is the perfect time to flex those budgeting muscles! If you tend to blow your budget and overspend in various categories, work on learning to stick to your budget. Revise your budget as necessary, avoid temptation by keeping away from stores and areas where you typically overspend or only shop with the cash you need to make your purchases. Training yourself to live within your means is one of the best ways to improve your financial health ahead of a recession.
Look for ways to increase your income
Did you know that the average millionaire has seven sources of income? You don’t have to go that far, but establishing additional income streams can be a great way to prepare for a possible recession. Consider starting a side hustle that plays to your strengths, moonlighting for a company like Uber and/or finding a passive income stream like a real estate investment.