5 Simple Ways to Prepare Your Personal Finances for a Recession

5 Simple Ways to Prepare Your Personal Finances for a Recession

A recession can be a scary time financially—but it doesn’t have to be if you prepare well ahead of time.

The economy in the U.S. is crumbling, and many are predicting a recession that could be on par with the Great Depression or worse. Around the world, inflation is soaring, and we can all feel the ground shifting—and with it, so are our finances and investments. Many people are anxious about inflation and sweating over making the right decisions to ensure their financial security when the economy gets sour. If you are looking to prepare well before the storm hits, here are a few tips that will help you figure your finances out. 

1. Create (or update) your budget plan

The first step to taking control of your finances is creating a budget. If you don’t already have one, now is the time to sit down and figure out where your money is going. Start by tracking your income and expenses for at least one month to get an accurate picture of your spending. Once you understand your cash flow, you can start making changes to fit everything into your budget. For example, if you’re spending more than you’d like on eating out, you can adjust accordingly by, for instance, cutting other expenses.

2. Cut unnecessary expenses and save, save, save!

Cutting unnecessary expenses will help increase your cash flow and reduce your overall financial stress during a recession or down market period. You can do so by reducing spending money on luxury items and unnecessary purchases, such as big houses, expensive cars and big-screen TVs. When shopping for groceries, buy in bulk wherever feasible to save money, especially when you have limited income to pay your bills or are trying to save up more.

As per U.S. Senator Elizabeth Warren’s book All Your Worth: The Ultimate Lifetime Money Plan, try to spend around 50% of what you earn each month on necessities, 30% on wants and 20% on savings—also known as the 50/30/20 rule of thumb. Although savings rates remain modest, they are gradually increasing. By saving in an online bank account, you may earn between 1.75% to 2% annual interest or more, which is higher than the average rate from a traditional bank. This may appear a difficult chore, but even small monthly savings may pile up over time.

3. Keep an emergency fund

It’s always a good idea to have some emergency funds on hand, but it’s even more critical during times of economic upheaval. It will help you tackle unexpected or regular expenses, like mortgages, medical issues, car repairs and school fees, when your wallet is tight. To calculate how much money to save up in your emergency savings, you have to go back to your budget plan to figure out how much you spend on bills and necessities. 

While it’s circumstantial, if you have a stable job, can rely on your family or friends, don’t have significant debts etc., an emergency fund that can cover three to four months’ worth of expenses might be sufficient. If your financial situation is less flexible (e.g., you’re expecting a child or the sole income source in the family), you might need to keep aside enough money for about a year’s worth of spending.

4. Get rid of high-interest debts

If you’re carrying high-interest debt, now is the time to pay it off. Credit card debt, in particular, can be very costly—so much so that it can make it difficult to save money or invest for the future. If you’re struggling to make headway on your debt payments, consider talking to a financial advisor about consolidating your debt or enrolling in a debt management program

According to CreditCards.com, the national average credit card rate has surpassed 17% for the first time in over two years. Moreover, the U.S. Federal Reserve intends to raise interest rates for the rest of the year. Therefore, getting rid of high-interest debt should be a top priority during any economic downturn.

5. Be mindful of investment risks

When planning for a recession, you don’t have to eliminate all risks from your investment portfolio entirely. After all, stocks tend to recover after a market fall, and there’s still room for growth even in bad times. If you have a stable job and have some time until retirement, you might want to explore investing more aggressively—just don’t over-monitor your assets, so you can get out fast if required. However, if you’re retired or nearing retirement age, now may not be the time to go all-in on stocks and other risky assets. Instead, prioritize capital preservation by investing in less risky assets, such as bonds and cash equivalents. 

If you are a beginner in investing, you can use micro-investing applications to your advantage. You may just invest small amounts of money, say US$5, in the market on a monthly basis, and your deposits will accumulate over time. It’s an efficient technique for first-time investors who want to dabble into the financial pool before diving in completely. Also, continue to learn more about investing—be it through reading books, Reddit posts or business newspapers—to ensure you are up-to-date with the latest developments in the market.

No one knows exactly what the future holds, but by following these simple tips, you can help protect your finances during these uncertain times. Remember to think long-term and don’t make rash decisions—we’ll get through this together!

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