Your Best Money Moves To Prepare for a Recession
Generally, a recession means a significant slowdown in industrial and trade activity.
This leads to:
- An uptick in unemployment
- A downturn in real estate values
- Lower investment values and economic activity
- A falling stock market
- A dip in interest rates.
All of which can seriously impact your wealth-building progress.
Economic research shows that inflation is currently rising to a 40-year high. The Federal Reserve looks like it’s planning to raise interest rates faster than it has in more than a decade.
Investors are seriously worried that 2022/23 will herald the beginning of the second great depression.
But, if you’re well prepared for the worst to happen, you can plan to mitigate the effect on your finances if a recession hits.
How To Prepare Your Finances for a Recession
Smart moves ahead of a recession involve following the Boy Scout code and always being prepared!
There’s no doubt that recessions can have a serious negative effect on your stocks and property portfolios.
But if you’re ahead of the curve in preparing for a financial downturn, you could turn the situation to your advantage.
Mitigating the Damage to Your Personal Finances
A recession won’t only damage the economy, but it’s also likely to have a major impact on your personal finances because of:
- Changes in interest rates
- Precarious job security
This is why we recommend taking the following steps to ensure that your financial plans aren’t derailed by potential interest rate drops.
So, here’s how you can build a financial backup plan to help prepare for a recession predicted by financial experts.
Budgeting To Build Your Wealth
Even in times of economic growth, living within your means is the best way to grow your wealth.
That means making sure monthly expenses such as rent or mortgage payments, car payments, and spending stay within budget.
That way, you’re feeding your savings accounts and not taking on more debt.
So, to prepare for a recession in an economic downturn, you should be mindful of staying within your budget.
Are you serious about creating a financial future of generational wealth? Or boosting your retirement account?
Then you need to start by being intentional about how you spend money.
Keep Your Good Credit
Hold off making a down payment on big-ticket items like:
- A new car
- Extra payments on low-interest debts
First, thoroughly plan your strategy for recession.
As you intentionally reject new debt…
Pay down high-interest debt, bolster your savings accounts, and keep an eye on your credit score.
Now is a good time to get any blemishes cleared up with the credit bureaus so that your excellent track record can support you if necessary.
Remember, credit is a tool to be used wisely.
If you find yourself in the position of needing a credit line at any point in the future…
Take intentional credit-boosting actions now so that your credit can support you when you need it to.
Start by pulling your credit report, not just for your score but so you can confirm the creditors, balances, and activity listed.
Good credit doesn’t just magically happen. Typically it’s built intentionally over a sustained period.
Your clever financial decisions should help you widen the gap between income/expenses. This will help you invest in the things that help you save for the future and achieve your investment goals.
Build an Emergency Savings Fund
To recession-proof your finances, you really need to prioritize building an emergency fund.
Your emergency-saving safety net can:
- Save you unneeded stress
- Help you avoid becoming over-extended financially
- Ensure you don’t have to leverage debt just to get by
Step one is putting aside 3 to 6 months of your basic living expenses to mitigate the risk of unemployment.
Then you can continue the process by slowly boosting your emergency fund to a year of basic living expenses.
When you’re calculating your essential expenses, remember to add in everything you need to get by in your normal daily life:
- Groceries
- Housing
- Utilities
- Transport
And build that emergency fund in a separate savings account so you’re not tempted to dip into it for other things.
Where Should You Put Your Emergency Fund?
Now you need to figure out where to keep your savings.
Currently, banks are raising savings yields quickly in response to the Fed’s aggressive rate hikes. Which can make that an attractive option.
But, it’s important not to sacrifice liquidity for yield.
In a great recession, you don’t want to lock your cash up too tightly. Rather, ensure that it remains accessible if you need it because of job loss to cover expenses.
It’s critical to build up an emergency fund while your financial situation is stable.
If you don’t, the time may come when you have to start making difficult decisions.
Things like withdrawing money from your retirement account or applying for a home equity line of credit (HELOC).
Diversify Investments in an Economic Downturn
When the going gets tough, having a diversified investment portfolio is crucial.
Ensure that your investments are evenly spread and your cash isn’t all tied up in one place.
Spread your investments across many industries and holdings to ensure their value.
Look for long-term, stable assets with as little volatility as possible.
Many investors already have company 401Ks, separate brokerage accounts, real estate, and business investments.
We’ve found commercial real estate syndications, like hotels and multifamily apartment complexes, to be good.
Many investors panic that a financial downturn also means falling stock prices.
That can be true, but don’t make significant changes to your investment strategy as a knee-jerk reaction.
Remember that markets tend to be forward-looking.
We might be preparing for the recession now, but most investors are looking ahead and planning for when the times get better.
Pay Off High-Interest Debt
With a possible recession snapping at your heels, the last thing you need is a stack of high-interest debt to pay off.
If you can pay off any debt you currently have, you can potentially save big money in interest payments. Then you can put the extra into boosting your emergency savings.
Request a copy of your credit report to ensure that you don’t have any nasty surprises when it comes to paying off those debts.
We would always advise paying off any credit card debt BEFORE you plan any further investments.
If you have high-interest debt, the cost of your interest payments may exceed the return on your investment.
Keep an Eye on Interest Rates
For instance…
If you have a loan or credit card debt with a 20% interest rate, it’s far better to pay off that debt as a priority.
The average long-term rate of return on the stock market is likely to be considerably lower than that.
Create a debt payoff plan to ensure you’re paying off more than the minimum payment on your personal loan or credit card.
If you’ve wanted to refinance any larger assets to lower payments or secure lower rates or better terms, now is the time – not once the recession hits.
Typically banks tighten policies during tough economic times, making it even harder for consumers to get on their feet.
So, as you review your car, home, credit, and loan statements this month, take special notice of your balances and interest rates.
Sometimes a simple call to the creditor can create savings for you. Other times, you discover that refinancing isn’t a bad idea.
Final Advice
Preparing for a recession is by no means impossible.
There may be tough times ahead…
But it makes sense to take proactive steps to prepare and ensure that turbulent times don’t derail your financial goals.
Simply being aware of your numbers is a huge step.
Gather all your statements, your credit report, and any other resources you use to track your finances.
Then, take the time – a dedicated “money date” to sort through all your accounts.
Feel free to create a spreadsheet or enter everything in an online tracker if that makes your heart sing.
Either way, from an informed position, you can track your progress, create a game plan, and make changes to your strategy as needed.