A recession is a prolonged business cycle contraction, which is typically said to occur when the economy goes through at least two quarters of negative GDP growth.
Since 1948, there have been at least 12 economic recessions of varying intensity in the US, once every six years on average.
Is another about to start? By the time we know, it’s likely already here and perhaps halfway over!
Here are five things you can do to recession-proof finances just in case.
Set up an emergency savings fund
Most financial experts agree that you should have at least six months expenses worth of money saved away in a high-yields savings account. During recessions, this money can save you a tone of stress and headaches.
Six months’ worth of expenses may seem like a daunting target. But don’t let that dishearten you, start and make small initial contributions on a regular basis.
Those will add up pretty quickly over time. You can even automate these deductions from your regular salary.
Get on top of your monthly spending
To create an emergency fund, you must first know your monthly expenses.
Check all your credit card bills and bank statements to see where all your money is going. Along with essential expenses like groceries and utility bills, you will most likely find luxuries and lifestyle spending.
Mark them for future cutbacks if you anticipate a recession on the horizon.
Better still, you could even cut them in advance and put all the savings into that emergency account. As a rule, try to keep your discretionary spending to less than 30% of your total income after taxes.
Manage your debt-related costs
Many people have a wide range of debts: credit cards, mortgages, student loans, auto loans, personal loans.
Some of these come with high interest charges or variable rates. Try to pay off these bets as quickly as possible to make steep savings on interest payments. Credit cards are a prudent place to start.
You can put any savings from this into your emergency fund.
With other kinds of debt, like student loans, the interest is usually low and the creditors often provide special provisions during times of economic hardship. You may be able to get temporary payment waivers or apply for forbearance.
Bolster your skills
Recessions are usually the season of layoffs. Having multiple skills and specializations could help make you an essential employee at your current firm.
It could also help you quickly find a new job should you get laid off. Find free training courses online, explore knowledge resources, and make use of any mentorship or upskilling options that come up at your workplace.
Be level-headed while investing
Recessions often force people into making knee-jerk reactions that cost them more money and potential income later down the line.
It’s not unusual for stocks to plunge by at least 30% or more in these times. If you have a long-term investment plan, stick to it and don’t let yourself get influenced by short-term events.
After all, most recessions only last a year, maximum. Smart investors use these times to buy up stock in stable, mature firms, keeping in mind long-term returns.
Most large companies bounce back stronger after a recession (most, not all). Do your research and stay calm.
