With record high inflation and rising interest rates, an economic recession has been the subject of many conversations lately. Now with two consecutive quarters of a drop in GDP (gross domestic product)—the benchmark many economists use to gauge a recession—the possibility of a serious economic downturn isn’t just fodder for conversation anymore. It’s time to get serious about protecting your finances for a recession. Here’s how you can make sure you’re prepared.
Build Up Your Emergency Fund
It’s widely recommended to have enough savings to cover three to six months of living expenses. The specific amount will depend on your circumstances. For instance, in today’s uncertain economy, you might feel it worthwhile to aim for more than six months. It might seem daunting, but don’t undervalue the effectiveness of small contributions on a regular basis. You can also think about automating your savings contributions for a set-it-and-forget-it approach. Whichever way you go about it, consistent contributions to an emergency fund help to build positive saving habits that will carry into the future.
Pay Down Credit Card Debt
Focus on paying down any high-interest debt. Not only will this help you be more prepared should you get laid off during a recession, but credit card APRs are rising in response to the Federal Reserve’s rate hikes. Knocking out debt could free up critical breathing room in your budget that you could use to boost your emergency fund.
Identify Ways to Reduce Expenses
Start looking at all the ways you spend money, and identify ways you can scale back on discretionary spending (services or items that aren’t necessities—vacations, dining out, cable, spa treatments, etc.). Typically, the guidance is to spend no more than 30 percent of your net income on discretionary purchases. Think about creating a monthly budget in order to stick to this guideline and ensure you’re not overspending.
Stay Invested
It’s tempting when the market is as volatile as it’s been recently to think about cutting back on 401(k) contributions or selling stock investments. Keep in mind, however, that you’re investing for the long term. Stocks rise and fall all the time, and history has proven that bull markets (rising market conditions) last longer than bear markets (falling market conditions).
Rebalance Your Portfolio
While you want to stay invested for the duration of a recession, you might consider rebalancing your investments. Depending on your age, risk tolerance, and investment goals, it may make sense to shift more investments into growth funds, which could potentially experience greater gains when the market rebounds. Be sure to keep in mind that money needed in the short term should not be allocated to these funds as they are high risk.
