How Do I Prepare for a Recession?

by | Dec 8, 2022 | Education

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Q: How can I prepare for a recession?

A: Taking steps to improve your financial health in case of a recession is a smart move. Here’s how to prepare yourself and your finances.

 

Take stock of your financial reality

Before you make any financial changes, ask yourself these questions:

  • What’s the total of my monthly income?
  • What’s the total of my monthly expenses?
  • What’s the total of my outstanding debt?
  • How much money do I have in savings?
  • How much liquid funds do I have?
  • Do I have any major and expensive life events coming up?

 

Build up your emergency fund

If you don’t already have a solid emergency fund, now’s the time to work on building one up. Ideally, an emergency fund should keep you afloat for 3-6 months. Pinch pennies wherever you can to get that fund ready for a recession.

 

Diversify your investments

With stock market fluctuations expected to be more extreme and to happen more often during a recession, it’s crucial to keep your investments diversified. Make sure your investments are not all tied up in one asset or asset class where a poor-performing investment could bring down your entire portfolio. 

 

Get rid of high-interest debt 

In a rising-rates environment, such as that of a recession, debt is more expensive than ever. If you have outstanding credit card balances, work on consolidating the debt by moving the balance to a personal/unsecured loan, or a single low-interest credit card.

 

Stick to a budget

This is the perfect time to flex those budgeting muscles! If you tend to blow your budget and overspend in various categories each month, work on learning to stick to your budget. Revise your budget as necessary, avoid temptation or only shop with the cash you need to make your purchases. Training yourself to live within your means is one of the best ways to improve your financial health ahead of, and during, a recession.

 

Look for ways to increase your income

Establishing additional income streams can be a great way to prepare for a possible recession. Consider starting a side hustle that plays to your strengths, moonlighting for a company like Uber and/or finding a passive income stream like a real estate investment.

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