Amidst the unprecedented times that the COVID-19 pandemic introduced, record high inflation rates and economic disruptions have taken a financial toll on American families. Today, with a shortage of workers in the supply chain and increased labor costs, families everywhere are struggling to pay for everyday necessities.
As talk of another recession and economic crash loom, you may be panicking about paying bills, earning enough money, and saving for your future. Read on for our top tips for preparing for a recession.
Review Your Finances
The first step to preparing for a recession is understanding your financial snapshot. Ask yourself these questions:
- How much income are you bringing home every month?
- How much are you spending on necessities and non-essentials?
- How much debt do you have?
- Can you make adjustments to your monthly budget?
The answer to these questions will help you determine where you can make adjustments, such as reducing non-essential spending or amping up your emergency fund. If you find yourself walking a thin line between financial stability and financial ruin, consider ways you can increase your monthly income.
Do you have a special skill set you can profit from? Can you sign up to be an Uber Eats or Door Dash driver? What are some consistent ways you can earn extra cash to help pad your budget?
If you’re unsure of where to start with your budget review, use the 50/30/20 method, which prompts you to split your income into three different spending categories: essentials, wants and desires, and savings and debt payoff. Learn more about using the 50/30/20 budget strategy.
Pay Down Debt
In a normal economy, you may be in a comfortable financial position to buy a new car, furnish your patio with nice furniture, take an international trip, or pay for other big-ticket items. However, in a recession, or leading up to a recession, you will want to reduce the amount of debt you accrue, as well as pay down existing debt as much as possible.
When a recession hits, having fewer bills is better, and while in normal times, you may not blink at the extra money you’re spending on wants and desires, it’ll become crucial in economic turmoil.
To avoid the stress that comes with extra loans, payments, and interest rates, consider paying down as much debt as possible while you can. Consider:
- Paying an extra mortgage payment each month
- Getting a side gig for extra cash that can be contributed towards debt
- Use raises and bonuses to pay off debt
These simple steps can make a big difference when a recession is in full swing, and by reducing your debt-to-income ratio, you’ll have a better credit score and can obtain new credit cards if harder financial times strike, and you find yourself in need of extra cash.
Start or Enhance Your Emergency Fund
Another way to plan for a recession is to amplify your savings while you can. This may include canceling a vacation, holding back on a home renovation project, or putting college off by a semester or two. The extra money you’ll have as a result can be used to start or enhance an emergency fund.
According to CNBC, many financial advisors will recommend having three to six months of living expenses in an emergency fund, but if you’re preparing for a recession, you should ideally have six to nine months saved. The funds in your emergency account can be used to pay for unexpected medical costs, vehicle repairs, and other funds you may not have planned for pre-recession.
Learn more about the importance of an emergency fund and how to start one.
As the talk of another recession continues, it’s a good idea to meet with a financial advisor to review your investments. An advisor can help you diversify your portfolio to reduce potential economic downturns and losses by helping you achieve a mix of investments, like bonds, stocks, and real estate.
Because different types of investments have different risk levels, advisors can guide you in creating and updating a portfolio that has both low and high-risk investments, leading to decreased loss over time.
Recessions can be scary, but if you’re prepared financially before they happen, then you reduce financial stress and struggle over time. To stay updated on financial information and strategies, subscribe to the Slavic401k blog.