How to prepare for a recession

March 17, 2020

By Kate Streit

How to prepare for a recession

A recession can have a major impact on your finances. While no one wants to think about the job loss, falling property values and accumulation of debt that a recession can bring, proper preparation can ensure that you’re able to financially weather the storm. Here’s how to prepare for a recession so you’re not caught off guard.

Make sure you have an emergency fund

A recession is marked by unexpected changes that can have a huge impact on your financial situation. A reduction in hours, a complete loss of your job and instability in the stock market can all lead to financial insecurity.

One way to safeguard against these risks is to have an emergency fund. If you don’t yet have one, it’s crucial to get started. You’ve probably heard that you should have at least six months of living expenses on hand, and this is sound advice. When calculating that figure, make sure to include all your recurring expenses that are absolutely necessary, including housing, transportation, utilities, food, debt and healthcare.

If you’re not accustomed to saving, the important thing is to simply get started. Even if you can only afford to put away a small amount of each paycheck, something is better than nothing. Automatic transfers to a high-yield savings account can help make the habit a little more effortless.

Manage debt

In order to be in the best possible financial position when a recession hits, it’s crucial to have a handle on debt. Aim to pay off high-interest credit cards and loans first, and you may want to look for opportunities to utilize 0% balance transfers.

If you have student loans, it may be wise to consider consolidating them.  If you lose your job or have a major loss of income, it may also be the time to put your loans in deferment or forbearance. You’ll want to use these options as a last resort, as they can increase your interest accrual and balance significantly over the long term.

Protect your investments

A recession can wreak havoc on your portfolio, so it’s important to have a clear picture on the state of your investments. Having a diverse portfolio is one way to hedge your bets and minimize the risk of loss.

The timing and extent of a looming recession can be difficult to predict, so be careful not to rely too heavily on making immediate investment decisions under pressure. Instead, when it comes to stocks, you could evaluate investing  in so-called “recession-proof” companies that have stood the test of time, and focus on consumer goods that remain non negotiables for many people even during times of hardship, such as food and household goods. If you’re unsure what investment options best match your needs and risk tolerance, be sure to consult your financial advisor.

Investing in real estate can be another way to further diversify your portfolio. Although investors worry about crashing home values during a recession, it may also be a great time to snag an amazing deal. Much like stocks, certain types of real estate can perform better during an economic downturn, including mobile home parks, apartments and industrial properties. Consider consulting a real estate professional for advice in this area.

Solidify your earning potential

With a recession comes the threat of job insecurity. Diversifying your skillset can make you more marketable if you need to switch positions or industries. When you get a raise or promotion, consider socking away that extra cash for a rainy day rather than changing your spending to reflect your higher salary.

A side hustle is also a great way to supplement your income. If you choose to make a passion project or hobby your extra gig, it can also serve as a way to beat the stress and anxiety that a recession can cause.

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