Preparing ahead of time for a recession can protect you against making costly mistakes and adding undue stress to your life!
The U.S. economy is slowly starting to disintegrate, and many experts are predicting that the next recession is going to hit hard. Citizens worldwide are feeling the effects of inflation on their finances, and as such, they’re also noticing that their investments are more prone to failure. Investors are uncertain about what the future holds, but they do know that they want to protect their portfolios against recession as much as possible. Don’t wait until the recession hits, but rather, prepare for the rocky road ahead with the following tips:
- Establish A Plan For Your Budget
The first step to ensure that your finances remain in the positives is to know where your money is going in the first place. Get a better picture of your spending habits by checking your expenditures for at least a month. During this time, consider how much income you have and how much you’re spending. You can use this exercise to also cut back on your spending in certain categories and adjust your budget as needed.
- Avoid Unnecessary Spending
During a time when the stock market is down and recession hits hard, it’s crucial to not spend money unnecessarily. Every penny you spend needs to be spent on a necessity! The easiest place to make some budget cuts is by eliminating luxury items and experiences such as travel, high-end fashion or anything else you don’t actually NEED. Whenever possible, you can further reduce your overall spending by purchasing household goods and groceries in bulk.
U.S. senator, Elizabeth Warren, authored a fantastic book titled, Your Worth: The Ultimate Lifetime Money Plan. She explained that the best way to spend money is by breaking it down into 50/30/20 categories. That means 50% of your income is invested into necessities, 30% of it on wants, and 20% on savings. Though savings account interest rates are still fairly modest, opening an online-only savings account can net you up to 2% yearly interest. Though it may appear daunting to get started, even saving small amounts of money to get started can yield fantastic returns!
- Create An Emergency Fund
Though having an emergency fund is always a smart investment, it’s even wiser during a recession. Should you lose your income or unforeseen circumstances arise, your emergency funding can help pay for your education, medical expenses or home repairs. To figure out how much money you can reasonably set aside for emergency expenses, you will need to look at your overall monthly spending and budget accordingly.
Though by no means is it a rule of thumb, it’s good to have about three or four months of living expenses put aside. Depending on your lifestyle and living situation, however, you may need to have enough money to cover at least a year’s worth of expenses. This is undoubtedly the case if you have young kids or a newborn to look after.
- Eliminate High-Interest Debt
During a recession, high-interest debts should be the first to go. Credit card debt is usually the most expensive type of debt that families have, and if you’re struggling with your finances, all the more reason to eliminate credit cards from your life. Having said that, you may need to reach out to a financial advisor or a credit counselor to help you get your spending on track.
Here’s a jarring statistic: the national average for credit card rates have surpassed 17%! The U.S. Federal Reserve has also revealed that they’re going to raise interest rates for the remainder of this year, and as such, eliminating credit card debt is a good way to go. Not having all of these interest rates stacking up will help you cut household expenses.
- Understand The Risks Of Investing
Though you should aim to keep risks fairly low in your investment portfolio, you don’t need to completely eliminate it to remain successful. There are some bonds primed to bloom. Most stocks recover after the worst effects of the recession subside, and if you have steady income and plenty of years to go before retirement, investing can actually help you, even if some of your investments are best categorized as risky. Learn how to invest to suit your requirements. Of course, if you’re older and nearing retirement, you will want to choose stocks and general investments that are less risky and don’t require much time to bounce back should you look to unload. In either case, you will still retain the ability to sell your stocks quickly even if the market takes a big hit. Don’t over-monitor your assets, but still play it by ear! For those nearing the retirement age, choosing cash equivalents and bonds provides adequate cushioning against a volatile market.