Ways to Prepare for a Recession
It's normal to be anxious about your lifestyle, career, and finances during economic turns. Being financially prepared will help you with anxiety and make it easier to get through difficult times. Here are a few ways to prepare for a recession.
Start or Bolster Your Emergency Fund
The importance of an emergency fund is more apparent in anticipation of hard times. If you don't have any rainy-day reserves, you may want to start building an emergency fund now. An emergency fund can prevent you from going into debt and reduce the possibility of a future financial apocalypse.
In case of unexpected job loss or major expenses like medical emergencies or car repairs, your emergency fund will allow you to tap into your cash reserves instead of paying with credit cards, skipping payments and bills, or selling your investments. If you already have an emergency fund, it may be a good time to bolster it to reduce emotional and financial stress in case you need to get through unfortunate events.
Learn more: Emergency Fund: An Important Part of Financial Planning
Focus on Paying Off High-Interest Debt
Getting rid of your debts makes good sense at any time. As a recession looms, paying down as much debt as possible is a pressing issue, especially for people whose employment may be at risk during a recession.
Recessions may coincide with rising interest rates, and if you carry debt with variable interest rates, your costs may increase when it hurts the most. Lenders also become risk averse during economic downturns, and it may be difficult to get a new credit line or a loan. Not accumulating new debt and reducing your current debt balances is an important part of preparing for gloomy days. You could avoid paying higher interest rates and may have more credit available to you for unfortunate events.
Getting rid of debt is not as easy as getting into one. But paying down as much high-interest debt as possible is one of the most profitable things you can do for your financial situation. You can plan for other things better when you've eliminated those costly obligations.
How to Do It
You may already realize the importance of having savings for a rainy day, and paying high-interest debt is already your priority. Here are a few practical ways of finding extra money for your immediate goals.
Create a Budget and Trim Your Expenses
If you don't have a lot of disposable cash, the first step in building an emergency fund and getting rid of debt is to look at your spending. Create a budget to understand where your money goes. This understanding will make it easier to find areas to slash. Cut all unnecessary expenses and learn how to live below your means. Use the freed-up cash to bolster your emergency fund and reduce debt.
Postpone Big Expenses
In the face of economic challenges, it's essential to ensure you can afford the monthly payment obligation in the worst-case scenario. Adding substantial monthly obligations like an expensive car payment may make things difficult if a recession affects your financial situation. It may be better to keep your discretionary expenses as low as possible.
Diversify Your Skills and Income Streams
Build Up Skills and Update Your Resume
One of the ways to prepare for a recession is to prepare for less overall job security. Learning new skills and taking on new responsibilities at work can make you indispensable during a bad economy and set you up for raises or promotions when the economy recovers.
If you have considered going back to school to get an advanced degree or improve your professional skills, now may be the time to do it. Professional development improves your chances of employment in the future regardless of the economy.
You can also search for new ways to supplement your income outside your full-time job. Besides earning more money, freelancing is a great way to learn new skills that could make you more valuable at your current job.
Look Over Ways to Make Extra Cash
You can expand your skills and income by working as a freelancer or taking occasional side gigs. There are many ways to make extra money on the side. Whatever your skill set is, you can likely find a way to use it.
Build Your Professional Network
One of the best ways to find a new job is to use your professional network. Building connections with the right people could be the key to finding new opportunities when you need them the most. Use best-suited social media platforms like LinkedIn for relationship-building.
Don't Panic and Plan for the Long Term
The most common advice from financial experts is not to panic. Market turmoils are not the time to make drastic decisions. In anticipation or during a recession, it may be a good idea to avoid investing in companies or sectors known to be high-risk or speculative, such as cryptocurrencies or start-ups. But for most investors with long time horizons, investing during a recession should not be drastically different from investing during an economic expansion.
Generally, your investments are most profitable when left untouched. This is especially true during volatile times when panic selling can result in losses. Staying invested through market ups and downs is key to maximizing the effects of compound interest and letting your money grow.
Learn more: Emotional Investing Can Cost You: What It is and How to Avoid It
Keep Up With Your Usual Contributions
It can be intimidating to invest while a recession is looming, but keeping up with your regular contributions can benefit you in the long term. Experts recommend staying calm and maintaining regular investments, and by staying the course, you can benefit from what are essentially sale prices on investments. To be at ease during uncertain times, keep in mind your future goals and avoid checking your portfolio's performance often.
Talk to your financial advisor before making any changes to your investments. However, it is good to consider your risk tolerance and make sure your portfolio is well diversified.
Learn more: Investing During Recessions
Diversify Your Investments
It may be difficult to build a recession-proof portfolio, but diversifying it may minimize the damage to your investments.
If your investments are not diversified appropriately, your portfolio may be at a greater risk. Make sure your financial plan is up to date and see if your investment mix has proper diversification for your situation.
Learn more: Diversification: Important Concept in Investment Management
The Bottom Line
Recessions are notoriously difficult to predict. Whether a recession is coming or not, preparing now can help you weather the worst of the difficult times and benefit you when the economy recovers. It's always a good time to start implementing healthy budgeting habits to prepare for financial emergencies or opportunities.