A recession can happen at any time and catch many people off guard. Being proactive and prepared is key to navigating an economic downturn. In this article, we will explore six practical steps you can take now to recession-proof your finances.
What Defines a Recession
A recession is typically defined as two or more consecutive quarters of economic contraction or negative GDP growth. High inflation paired with low or no economic growth is also indicative of a looming recession. Currently, inflation is around 6.8% while interest rates are about 5% as central banks attempt to curb rising prices.
With recent volatility in markets and global uncertainty, many economists predict the next recession is on the horizon. The best time to prepare is before it strikes.
Preventative Actions to Take
Here are three preventative steps to prioritize in anticipation of tougher economic times:
Cut Discretionary Spending
Review your budget and identify areas where you can trim excess spending on wants vs needs. Dining out, travel, shopping and entertainment are common categories to reduce. Distinguish between essential costs and discretionary expenses. Each dollar saved now bolsters your recession resilience.
Optimize Recurring Costs
Proactively call your service providers to request discounts or reductions. As a loyal customer, you have negotiating power. Suggest win-win solutions that retain their business at slightly lower prices. Target cell phone bills, rent, credit card interest rates, subscriptions, student loans and car payments.
Save an Emergency Fund
Bulk up your rainy-day reserves with enough to cover 3-6 months of living expenses. This gives you a financial safety net should you lose your job or face unforeseen costs. The peace of mind is invaluable. Aim to have this liquid cash reserve in place as soon as possible.
Positive Moves to Make
Complement defensive actions with a few offensive plays to stabilize and strengthen your situation:
Avoid Panic Selling Investments
Resist the urge to cash out stocks during market downturns, which locks in losses. Adhere to a long-term buy-and-hold strategy, ignoring short-term volatility. Dollar-cost average by making equal investments over an extended timeframe.
Explore Income Diversification
Update your resume and proactively look for a new job or side hustle. Enhance in-demand skills via online courses. Expand your income streams so no one source accounts for all your earnings.
Diversify Your Investment Portfolio
Mitigate risk by holding a balanced, diversified portfolio with stocks and assets across various sectors, countries, etc. This ensures any single company or industry downturn won’t disproportionately impact you.
Execute Future Big Expenses Judiciously
Postpone large upcoming expenditures like a wedding if possible. Having extra cash in the bank during downtimes allows more options. Rebuilding savings is tougher when money is tighter. Prioritize flexibility.