Recessions are notoriously very hard to predict. Many economists are predicting a recession sometime soon while according to others, it could be years away. In any case, it’s smart to assume that it could occur at any moment and hence, preparing early is important. Following are 10 tips to financially prepare yourself for a recession so you can feel secure incase the economy continues to get worse with time.
1. Set a Budget
If you haven’t created a budget, now is the time to get started.Set a budget and start tracking your spending to get a sense of how much money you earn versus how much you spend. During recessions, reduced hours, job loss, or less work for the self-employed is common. If your income varies each month, then you might want to trim your spendings.
Get a sense of how much you need to pay for the necessities each month. Follow the 50/30/20 budgeting rule, i.e. allocating about 50% of your net income to necessary expenses, e.g. transportation, utilities, food, and housing, spending 30% however you please, and using 20% to pay off debt or keeping it into your savings accounts. Feel free to adjust these percentages according to changes in your financial situation.
2. Build an Emergency Fund
If the future is uncertain, one of the best things you can do is build an emergency fund. Generally, experts recommend having 3-6 months of expenses saved. However, if you want more flexibility in case of an emergency, try to save more, e.g. 6-12 months of expenses. If you already have an emergency fund and a recession seems likely, consider adding more to it than you usually would.
3. Fix Your Mortgage
If you haven’t already, now is the perfect time to talk to a mortgage broker to determine whether you would do better on a fixed rate in case the interest rates rise due to recession. If you cannot move to a fixed rate or you simply don’t want to, it’s a good idea to prepare for mortgage rate increase by ensuring you can afford a higher monthly payment.
4. Put Off Larger Purchases
Sometimes, you cannot avoid making a large payment. For instance, if your car severely breaks down and you live far away from any public transportation, you will have no choice but to spend money on either having the vehicle repaired or buying a new one. But don’t make large purchases unless if you absolutely need to. You should focus on saving as much as possible.
5. Look for Side Hustles
Ahead of a likely recession, it is recommended that you find ways to supplement your income. If you have the time, side hustles are the fastest way to bring in extra cash. You can find freelance work that requires the skills you possess or you can simply capitalize on a hobby such as knitting, painting, dog-walking, gardening, etc. to make extra income.
6. Build Up Skills On Your Resume
During a recession, losing a job is a common occurrence. So, it’s best to be prepared and consider your current job position expendable. Take every opportunity to increase your skills in your current as well as other fields, build crucial connections, and network to prepare for the future. Add each job accomplishment and successful training to your work portfolio and resume. These steps will help you make sure that you are ready to jump ship whenever the situation demands it.
7. Invest Wisely
Recessions are surprisingly not bad news when it comes to investing as they bring with them various opportunities, particularly for those who are willing to invest in companies that have a track record of being resilient in challenging economic conditions. Recessions in the past provide evidence that spending on essential goods seldom drops during these challenging times, so the manufacturers that offer these such products are usually a safe investment option. If you have significant savings in cash, now might be the time to consider these alternative investment options.
8. Improve Your Credit Score
During a recession, credit becomes scarce. Financial institutions increase their lending standards because of less money flowing around the economy. This makes it difficult to get approved for a personal, auto, or mortgage loan. So, it is highly recommended that you do your best to improve your credit score. Monitor your credit score on regular basis. Use your credit wisely, pay your bills on time, and effectively manage your debt. Having a good credit score will help you buy items on credit or access funds if your hours are cut at work.
9. Avoid Panic Selling
During a recession, many people panic and withdraw money from their stock portfolios and other long-term investments. This is an unwise move as it results in huge financial losses when many cannot afford the risk. Keep in mind that when you put money in a long-term investment, you anticipate that it will be affected by economic ups and downs. You can only benefit from your investment if you stay put and access the situation to make informed decisions.
10. Stay Calm
A recession is a natural part of economic cycle. It is not the end of the world so don’t fall prey to doubt, uncertainty, and fear. Fear of a recession can affect you more than the actual downturn. From the previous events, it is evident that the average recession doesn’t last long, only its expansion periods do. So, protect your mental health during such a challenging time by reminding yourself that these economic falls are typically short-lived.
Final Thoughts
With planning and preparation, you can lessen the effects of a recession on your finances. Maintaining good financial habits and following the above-listed tips will help you protect yourself through times of financial uncertainty. Whether or not the predicted recession occurs, getting your finances in order is still a good idea. In this way, you will be prepared for the next economic downturn. Till next time!-The Black Sheep