With many economists predicting a recession sometime soon, it’s wise to start preparing just in case. There are numerous ways to improve your financial situation regardless of your income level. Here’s how to get started, plus tips on what not to do during an economic slump.
The Predicted Recession
There’s growing talk of an economic downturn. With inflation gathering steam and the Fed predicted to push up interest rates in response, the first half of 2023 will likely bring a recession. Many factors are compounding the issue, including:
- Rising food prices due to embargos on Russian wheat, wheat fields in Ukraine being burned and Ukrainian wheat harvests being stolen or destroyed.
- Pandemic supply chain issues.
- Billions of people spend more money than usual after quarantine, such as by going on vacation or getting married.
- Increased energy prices due to Russian oil sanctions.
It’s essential to keep in mind that even if a recession happens, it may still be very mild or short-lived.
Tips for Preparing for a Recession
Whether or not the predicted recession materializes, it’s still a good idea to get your finances in order as soon as possible. That way, you’ll be even more prepared for the next economic downturn.
Create an Emergency Reserve
If you have car trouble, you need to visit the dentist, or your home has a water leak, can you pay for it without breaking the bank? Unexpected bills are a part of life, so it’s essential to prepare for them even during prosperous times. Having a solid emergency fund is critical during a recession.
Aim to start a fund that covers three to six months of minimal living expenses — that is, don’t budget for things like going out to eat or taking a vacation. If you’re retired, you’d do well to save for at least one to two years’ worth of expenses.
These emergency funds shouldn’t be tied up in real estate or an investment account. You should be able to draw from them immediately if you lose your job or face an unexpected rent hike. Other than paying off debts, prioritize building your emergency fund above all else.
You can start by putting just a few dollars a day into your account. Setting aside even $3 a day means that in one year, you’ll have saved $1,095, which can be immensely helpful if you get an unexpected bill. Consider what minor expenses you could eliminate — such as a streaming subscription or smoking habit — to save thousands of dollars in the long run.
Automate Your Savings
The easiest way to start saving money is to do it automatically. Set up an automatic transfer with your bank or employer to make regular deposits into a savings account. If you have any recurring bills, use autopay to cover them. This will reduce your financial stress, ensure your bills are paid on time and slowly build up your savings account.
Interest rates tend to increase during a recession. If your credit card has a variable rate — meaning the interest rate can change based on factors beyond your control — it’s vital to pay off the card as soon as possible. You could save hundreds or even thousands of dollars in potential interest by paying it off before the recession starts. This should be your number one priority during an economic downturn.
Put off Larger Purchases
Sometimes, making a large payment is unavoidable. If your car is beyond saving, but you live miles from any public transportation, you may have no choice but to buy another vehicle.
But don’t make large purchases unless absolutely necessary — now is the time to save as much as you can. If you lose your job, interest rates go up, or your cost of living increases substantially, you’ll want to have a large nest egg set aside.
Consider Sticking With Your Job
It’s true that many people are quitting their jobs right now. When polled, 45% of American employees said they would consider leaving their job if they got a better offer. This phenomenon even has a name — the Great Resignation.
It’s understandable if you’re tempted to look for better job opportunities, but recessions are a notoriously tricky time to be out of work. Many employers are forced to lay off workers and go on hiring freezes, meaning that if you put in your two weeks’ notice before a recession, it could be a while before you find another job.
Rather than looking for a higher-paying job, upskill yourself so you can earn more at your current place of employment. This also bolsters your chances of staying employed even if your company starts laying people off. If you do need to quit, have a solid backup plan in place. You should ideally have another job lined up before jumping ship.
Get a Side Gig
These days, it’s incredibly common to have a second job. Put in an hour or two per week mowing yards or selling art. If you can, get a side gig you can do alongside your main job, such as dog sitting or house sitting while you work on your laptop. That way, you can earn a little more without putting in too many extra hours.
Share Your Living Space
With rent prices soaring, it’s no wonder that as of 2021, over half of all Americans aged 18–24 lived with their parents. Others cut costs by sharing their home with roommates, a spouse, or an unmarried partner. Consider staying where you are if you already have a shared living situation. If you have an empty room in your house, you may even be able to rent it out to make some extra income.
Hold Onto Your Investments
If you have investments, you may feel rising anxiety as your portfolio shows falling prices. But remember — these losses are only theoretical until you withdraw your money, a principle called locking in your losses. Don’t let your emotions guide your financial decisions.
It’s common for the market to have some of its best days right after its worst days, so fight the urge to sell during a bear market. You want to invest for decades, holding steady even as your investments rise and fall in value over time. You’re statistically more likely to make a profit the longer you wait to sell.
Consider shifting your investments into sectors like energy, health care, and consumer goods, which people will always buy regardless of their financial situation. These are solid investments during a recession. Or, switch your assets from stocks to bonds.
Bonds are an excellent choice for people looking for a fixed income. Every year, you’re guaranteed to gain a small amount of interest on the bond, which adds up slowly over time. This offers a safe return on your investment, even if the return is much smaller than what you’d get by buying stocks. Bonds aren’t subject to plummeting in value during a recession like stocks are.
Keep Investing if You Can
Taking on additional debt or making big purchases during a recession is not advisable. However, keep investing if you’re financially privileged enough to do so. Whether you have a Roth IRA, brokerage account, or 401k, stick to your plan and keep depositing money into your account. You’re more likely to avoid losses the longer you stay in the market.
Don’t Co-Sign on a Loan
A recession isn’t the best time to co-sign on a loan, meaning you’re signing up to be someone’s backup in case they fall through on their payments. Although co-signing can help a friend or family member with a poor credit history, you’re ultimately responsible for the debt if they can’t pay it off. That’s a risky move during an economic downturn. Instead, give someone cash or a personal loan if you want to help them financially.
Remember that recessions are a regular, temporary part of the economic cycle and the economy always bounces back even stronger afterward. You’ve already been through multiple recessions in your lifetime. In the US, the average post-war recession only lasts 10 months, while expansion periods last almost five years.
So, don’t fall prey to fear, uncertainty, and doubt. You don’t need to constantly watch the news or read every doomsday article predicting another Great Depression. It’s possible to stay informed without fixating on the worst outcomes, and it’s possible to be prepared without being anxious. Protect your mental health during a recession by reminding yourself economic slumps are usually short-lived.
Weathering Any Storm
Recessions are a part of life. The good news is experts know how they work, so there are reliable ways to prepare for and get through them unscathed. Your best bet is to create an emergency savings account, hold on tight to your investments, reduce your debt and wait to make large purchases until after the recession ends.
Above all, keep a clear head and do your best not to make any irrational financial decisions. Things will be back to normal before you know it.