Many are worried that we are approaching a recession (or even in one already!). What does this mean for your finances, and how can you prepare for a recession?
Economists are divided on whether we’re already in a recession or likely heading toward one. All signs seem to point toward it: inflation has hit a 40-year-high, interest rates have hit a two-decade peak, and investing in the stock market now is like riding a terrifying roller coaster.
Taking steps to improve your financial health in case of a recession is a responsible and forward-thinking move. Here’s how to be in a position to weather a recession with confidence.
Before you make any financial changes, ask yourself these questions:
If you don’t already have a well-padded emergency fund, now’s the time to work on building one up. Ideally, an emergency fund should have enough to keep you afloat through three to six months without any income.
Having this money set aside in case of an emergency or unexpected financial stress can help you avoid getting tangled up in a cycle of debt or even losing your home or car. Pinch pennies wherever you can to get that fund ready for a recession. It may be challenging now, but the security of having money safely tucked away to get you through difficult financial times will be more than worth the struggle.
With stock market fluctuations expected to be more extreme and to happen more often during a recession, it’s crucial to keep your investments diversified. Make sure your investments are not all tied up in one asset or asset class so that a poor-performing investment won’t bring down your entire portfolio. Mutual and index funds provide a great way to diversify your portfolio.
It’s never a good idea to hold onto high-interest debt. This monthly bill can increase significantly in an environment with rising rates, like a recession. If you have one or more outstanding credit card balances, work on consolidating the debt by moving the balance to a personal/unsecured loan.
You can also transfer the debt to a new credit card with no interest or a low interest rate. Credit unions generally have lower rates than banks. Remember that many no/low-interest rates are promotional, short-term offers. When the introductory period ends, you’ll be hit with interest rates that may be even higher than the rate you are paying now. So, be prepared to transfer again if you don’t pay it off fully before that introductory period concludes.
This is the perfect time to flex those budgeting muscles! If you blow your budget and overspend in various categories, learn to stick to it. Revise your budget as necessary, avoid temptation by avoiding stores and areas where you typically overspend, and only shop with the cash you need to make your purchases. Training yourself to live within your means is one of the best ways to improve your financial health before a recession.
Did you know that the average millionaire has seven sources of income? You don’t have to go that far, but establishing additional income streams can be a great way to prepare for a possible recession. Consider starting a side hustle that plays to your strengths. Try moonlighting for a company like Uber and/or finding a passive income stream like a real estate investment.