There is some debate about whether we’re in a recession or heading for one. But the smart money is on preparing for things to get worse before they get better. Even if a recession has not yet become “official,” it never hurts to put your financial house in order.
Although everyone will have to endure an economic downturn, some will weather it better than others. If you want to be one of the former, take note. Here are four ways to improve your financial footing during a recession.
1. Address Your Debt Beforehand
It’s always wise to work on reducing your debt. However, in uncertain economic times, doing so becomes even more important. If we may be headed into a recession, you should address your debt before it hits.
If you have balances on high interest credit cards now, they’re just going to get worse. Interest rates are on a rapid ascent. Working to pay down that debt will put you in a less precarious position.
Think about using a secured credit card to help keep you from overspending and paying that interest. Make timely payments and pay off the balance every month, if possible, and you’ll watch your credit score rise instead.
Paying down high-interest debt now is a smart move because employment can become uncertain during a recession. Unless you have a healthy savings account, you’ll need your credit to make ends meet if you lose your job.
The less debt you have going into a recession, the better. You can wait until interest rates fall before buying that new car or home entertainment system. Then, you’ll be doing your part to pull the economy back up.
2. Build Your Emergency Fund
One of the lessons learned from the pandemic-induced recession is that too many people don’t have money to fall back on. One July 2021 survey found that 51% of Americans don’t have enough savings to cover three months of expenses. Moreover, a quarter of them have zero savings.
Should you pay down debt or sock money away? Ideally, you should do both. The reality is that it’s complicated.
Both will be important if you lose your job, have a medical emergency, or face some other major expense. If the worst happens, you can dip into your savings or use your credit to get by. Of course, the former comes without accruing the interest of the latter.
It is also important that you stash your cash into something you can access quickly and without penalty. A high interest–bearing checking account is more liquid than, for example, a money market account. Most money market accounts limit the number of withdrawals, which makes them poor substitutes for a regular checking account.
Figure out how much cash you can put into a savings account from every paycheck. Then get into the habit of doing it, just like making your rent or mortgage payment. If you find yourself without that paycheck, you’ll be glad you did.
3. Lower Expenses and Update Your Resume
A fairly automatic response to a recession is pulling back on what you spend. Now is a good time to inventory your expenses and look at what you can cut. If you’re subscribing to five or six streaming services, you may want to unsubscribe from a few. Or you may decide to eat at home more and eat out less.
After you look at your expense sheet, dust off your resume. It may be an employee’s market right now, but a recession will change that. No matter how secure your job seems today, you should be prepared to respond immediately if it’s gone tomorrow.
You don’t have to throw out your existing resume and start over. There are several small updates you can make to have it ready should you need it. Revisit your list of skills, delete ancient employment history, and proofread, proofread, proofread.
Lowering your expenses will help you pay down debt and leave you with money to put into savings. Updating your resume means you can fire it off immediately to a potential employer if your current one lets you go. That’s a one-two punch that might keep you afloat even when things get tough.
4. Protect Your Investments
If you have money invested in the stock market for your retirement, its current volatility is frightening. If we do enter a recession, stocks could hit rock bottom. Companies struggle to be profitable during a period of recession.
Instead of panicking, keep things where they are. You’re likely to lose a lot of value if you abruptly liquidate or rebalance your portfolio. Riding it out may be easier if you stop looking at your quarterly statements for the time being.
Paying down debt to free up credit and building an emergency fund can also help you protect your retirement. Ask the people who had to cash in 401(k) plans to weather the pandemic. For most people, it’s tough to start saving for retirement all over again.
Finally, protect yourself and the things you own by revisiting your insurance coverage. If you cause a car accident and someone sues, you want to have substantial auto insurance coverage. You may be surprised at how little it costs to markedly increase your policy limits.
You have probably always made sacrifices to contribute to your retirement accounts and to insure your home, auto, and life. Those are all worthwhile investments. Protect them from the worst-case scenario, and when the recession ends, you can pick up where you left off.
It’s tough to keep your footing during a recession. Doing what you can now to stabilize your finances is a smart strategy. If the recession does hit, you’ll be one big step ahead.
