Money Smarts Blog
5 ways to prepare for a recession
Jun 30, 2022 || De'Laina Miller, Financial Health Coach
Let’s consult the Magic 8 Ball: Is a recession coming?
Warning signs are on the rise with sky-high gas prices, a continued labor shortage and steep inflation.
Don’t hit the panic button quite yet, though — the answer is still a little hazy. For starters, we can’t ignore that the economy is still technically in a growth period after the pandemic. Job creation is chugging along, and demand at retailers and restaurants soared during the first half of the year. But a growing number of Wall Street economists are forecasting a downturn in 2023, making us think about how to prepare.
What’s a recession?
For starters, the National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that’s spread across the economy and lasts more than a few months.” This decline typically occurs over two consecutive quarters (six or more months). Although unpleasant, recessions are a fairly normal part of the business cycle. In fact, the U.S. has toughed it out through 13 recessions since World War II, according to History.com.
How to prepare for a recession
Before we get into this, we want to remind you that we are here to answer your questions. Sit down with a Financial Health Coach to talk in depth about your personal situation, give us a call at 309-793-6200 or schedule an appointment online.
1. Live on a budget. Now’s not the time to be wasteful with your hard-earned money. Sit down and take an honest look at your financial situation. What’s your monthly income? Where’s your money going? Are there any unnecessary expenses that can be cut out for a while (the answer is almost always yes — you can be fine without Netflix for a while). Maybe you can opt for generic brands instead of name brands. Maybe you can arrange a flexible work-from-home schedule to save on gas money. The point is sensible spending can help you manage your money better and reach your goals faster. Need some help getting a budget going? Check out our Budget Resource Guide. Or take our Creating a Budget quiz on Compass.
2. Build your emergency fund. This is always important, but even more so in the face of an economic slowdown. Most financial experts recommend stashing 3-6 months of savings, so get started now by setting up (or increasing) a direct deposit that’ll automatically transfer money every payday. Even if it’s just $20 each paycheck, that’s $260 after six months. You never know when you might need a little something extra to help cover unexpected events.
3. Continue to pay down debt. Even with a recession on the horizon, you’re still going to have to take care of any outstanding debts. Focus on paying down cards and loans with the highest interest rates first. You may want to hit the pause button on making extra payments, but do still make your minimum payments so you’re not hit with additional interest and fees.
4. Keep saving for retirement. Investing in anything takes some degree of risk, but you’ll want to keep contributing to your 401k or IRA. Avoid panic-selling and continue to look at the long-term big picture. Already retired? Consider a part-time gig to supplement your income no matter what the stock market brings.
5. Strengthen your skills. One of the hallmarks of a recession: unemployment. Nobody wants to think about being laid off, but it’s a reality for many during a downturn. Even if you have a steady job now, take some time to strengthen your skills or brush up on training that makes you more marketable in your field. Networking could also pay off big later — you never know what opportunities may be waiting.
Having trouble keeping up with your bills? Use us as a resource. There are always options available, and we’ll go through them together to find the best way to help.