Recessions are a normal part of an ever-changing economy. Although more than a decade has passed since our economy emerged from the throes of the Great Recession, many economists predict another may be on the rise. As such, a little vigilance can prepare you for the inevitable.
A recession is generally defined as a shutdown of economic activity measured by GDP (gross domestic product) and lasting for two consecutive quarters, at a minimum. The National Bureau of Economic Research (NBER) defines it as: “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough.”
With memories of the Great Recession of 2008 still burning in our memories, it’s worth taking some time to prepare mentally, emotionally, and financially for another round. From bulking up your rainy day fund to exploring your options through debt relief programs, here are four steps to recession-proof your finances.
1. Track Your Cash Flow
It is important to know where your money comes from and where it goes. This is the starting point for financial security, regardless of whether another recession is nigh.
After identifying your assets and evaluating your debt and savings, you may want to revisit your budget. If you do not already have a working budget, you should: It is a tool to help you control your money whether preparing for a recession or simply managing your day-to-day finances.
Consider building two budgets: one for today, and one for hard times. In the event of a recession, your financial position may change. Having a secondary budget strictly focused on providing those things you need to survive will provide a roadmap for navigating the change. With this budget ready to go, you can avoid the stress and panic that often comes with a sudden job loss or change in income.
2. Crush Debt
Debt makes you vulnerable in the event of a recession. In hard times, outstanding debt is often the first thing to be pushed aside leading to late fees, defaults, and worse. To recession-proof your finances, you need to reduce and eliminate your debt.
Start by eliminating debt with the highest interest rates first. This may mean making higher payments on your high-interest loans for a while and making only the minimum payments on other debts. Once you pay off the high-interest debt, you can increase the amount paid on outstanding balances with lower interest rates. This so-called “snowball” method of paying down debt is effective because balances with lower interest rates do not climb as quickly as those with high interest.
While cutting up those credit cards is a great way to prevent new debt, credit does carry some benefits you may not want to forfeit. If you enjoy the cash-back rewards or other perks of using a credit card, just make sure you maintain a zero balance. This means you pay off the amount owed in full each billing cycle, avoiding the accrual of interest on a snowballing balance.
3. Save, Save, Save
Building an emergency fund is vital to surviving a recession. While you might use your emergency fund to cover short-term expenses like car repairs or catastrophic health events, consider that a recession may demand draining your savings to fund simple daily expenses like groceries. As such, you (arguably) cannot save too much. While many financial experts recommend banking three to six months’ living expenses, aim for closer to twelve months to give you financial security — not to mention, peace of mind — should a recession strike.
If you do not already have one, consider opening a fixed-rate savings account for your emergency fund. Right now, interest rates for savings accounts are on the rise at two percent Annual Percent Yield (APY). When the economy takes a turn, the Federal Reserve will lower the federal funds rate. This encourages borrowing which helps the economy rebound, but it also leads to a reduced APY rate on savings accounts. Get the most of your money by earning the highest interest possible on your savings.
4. Dust Off Your Resume
Recessions often bring layoffs, so it’s worth preparing. Regardless of your industry, you may benefit from devoting some time to polishing your resume and updating your LinkedIn profile to reflect your current employment status and skills. By doing so, you can prime yourself for future opportunities, even if a recession brings temporary unemployment.
To keep your job, Harvard Business School Online says it is important to “demonstrate your worth.” You can do this by developing skills to give you a needed boost at your company. By doing so, you can make yourself indispensable and become an asset to your employer should a recession-driven layoff become necessary.
5. Review Your Asset Allocations
Before a recession hits, review your asset allocation, that is, your mix of investments that matches your various financial goals. For example, if you are nearing retirement age, you may need to make your investments more conservative, whereas if you are younger, your investments have more time to withstand market volatility.
6. Make Extra Loan Payments
If you are struggling to pad your emergency fund, there is another trick to lowering your monthly expenses: pay down your debt! Once you knock out your car payment or credit card payments, that is one less monthly payment dogging you each month. Consider this: The $1,000 you consistently paid into your various debts can now be devoted entirely to building a robust emergency fund.
At the very least, refrain from taking out any new loans or opening new credit cards until you have paid down your current debts.
Preparing for Your Financial Future by Eliminating Debt
If you are struggling with a heavy debt burden, consider enrolling in a reputable debt relief program for assistance. These programs can help you navigate your debt by coming up with options like debt consolidation loans for poor credit, credit card balance transfers, and even debt settlement.
The debt relief process is inherently stressful and challenging, but it doesn’t need to unreasonably complicate your life. By starting out with these basic steps, you can work through the process intentionally and optimistically.
