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5 steps to recession-proof your finances

Jesse
5 mn

With rising inflation rates and economic downturns around the world, there's plenty of speculation that we're headed for another global recession. While the media tends to paint the darkest picture, it's always worth being prepared. In this article we're providing five action points you can do now to ensure that your finances remain recession-proof.

The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months. It's worth noting that these are a natural part of the economic cycle and are completely unavoidable. The best thing you can do is be educated and prepared with a reliable plan in place to overcome any economic downturn.

According to a study conducted by Empower and Personal Capital, 74% of consumers in the U.S. are concerned over an impending recession. While some analysts believe the recession has already started, Goldman Sachs has predicted there is a 30% chance of one materializing while UBS has forecast "no recession".

Whichever side of the fence you sit on, it can't hurt to be prepared. While it sounds dark and gloomy, we're here to help you prepare for a recession.

Anxious about an incoming recession?
Here are 5 steps to get yourself recession ready

1. Try to eradicate debt

The first step of most financial plans, paying off high-interest debt is a valuable practice. The recent increase in interest rates by the Federal Reserve has seen credit card rates rise over 17% for the first time in two years. Analysts are predicting that these interest rates will continue to rise in the coming months. Avoid credit card debt and the high-interest rates associated with them.

If you are carrying high-interest-rate debt, your best port of call would be to strategically manage this, with the intention to pay it off as soon as possible. With recessions oftentimes come job cuts, and if this happens to you paying off your debt now will be a worthy exercise. Known that in times of recession, interest rates will increase.

2. Lessen your expenses

Consider your monthly living expenses and what you spend money on and see where you can make cuts in order to prepare for the "worst case scenario". Consider what would happen if you were to receive a lower salary, if you were to lose your job, or if you were suddenly faced with an emergency (more on emergency savings next).

While these can take place at any stage, having a plan will help you to be prepared should you come face to face with this. Monitoring your monthly expenses is, either way, a great opportunity to stay on top of your finances and improve your financial situation.

3. Establish your emergency savings fund (and bulk it up)

If you haven't already done so, establish an emergency fund. Financial advisors define an emergency fund as three to six months' worth of living expenses. This emergency fund is to be used for unexpected expenses like home repairs, a car issue, a medical emergency etc. This is separate from your retirement account, and acts as a cash cushion should you need it.

As you prepare for a recession, it's advised to bulk up your emergency fund to be at least six months' worth of expenses/salary. This personal budget will act as your financial safety net should you need it, a rainy day fund. For bonus points, try to keep this in interest-generating savings accounts. 

4. Update your resume

In the unfortunate event of losing your job in a recession, it will bode well to build your resume up before the time so that you can immediately start searching for a new job. During recessions, the job-seeking market tends not to favor job seekers so being prepared beforehand may work out to be to your advantage.

Alternatively, if you were considering advancing your education or going back to school, this could be a prime time to do so. This will not only improve your chances of employment in the future but also allow you time to emerge when the job market is more favorable.

5. Stick to long-term investment plans

In times of recessions it might seem tempting to cut back on retirement savings or pull investments, but try to hold strong. These investments are for the long term and will lose significant value if pulled prematurely, especially in the crypto and stock market.

Focus on managing your emotions and consider the long-term benefits. After the recession moves into its next economic phase would you rather have your long-term investment in place, or have to start again? Especially if your investments are linked to a retirement portfolio. For ease of mind, know that historical data proves that a bull market lasts longer than a bear market.

Whether you're invested in crypto, gold, or the stock market, stick to your long-term strategy and don't be tempted to make decisions based on fear, they rarely turn out to be good ones.

Closing thoughts on surviving economic downturn

Recessions tend to carry a lot of fear mongering news, however, did you know that the recession in 2020 only lasted for two months? While they're times of little to no economic growth, they are just as quickly corrected and allow new innovations, services, and economic activity to ignite. Consider it a breeding ground for new opportunities.
Use the time beforehand to prepare for a recession by managing your expenses, freeing yourself from high-interest rates, and building an appropriate savings account to see you through. If in doubt, consider speaking to a financial advisor who can professionally guide you in building a solid financial plan. 



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