Recession, soft landing and economic slowdown are frequent buzzwords on the news about the economy these days. Regardless of your feelings about the current state of the economy, there’s sufficient evidence that a recession may be on the horizon (NPR). Indicators like a 9% inflation, the slowdown in hiring from the top U.S. tech companies, lower GDP growth estimates, an inverted yield curve and the dismal stock market performance are making it clear investors are feeling pessimistic. If you are also one of these pessimists, here are some steps to prepare for a recession.
Re-evaluate Your Debts
In a recession, the last thing you want to think about is how you’re going to pay your debts. Now is the best time to re-evaluate your obligations. The best strategy is to first focus on high interest debt. High interest loans are more expensive than other loans and usually include credit card debt or personal loans. If you are able to, aim to pay as much as you can on these debts as they have a higher probability of ruining your credit if left unpaid in the future.
If you’re not sure your job will be secure during a recession you need to start budgeting now. The aim of budgeting is to ensure that you’re saving as much as possible to add to your emergency fund in case you are laid off. Budgeting does not mean you need to drastically change your lifestyle and stop buying your favorite Starbucks coffee. It just means you’re more cognizant of your spending and prioritizing your future wellbeing over instant gratification.
Technology has made budgeting easier than ever. There are numerous budgeting applications that can be found on both iPhones and android phones. These apps make it easy to track your spending and income. Some even present your spending habits using graphics that make it easier for the user to decide where they can cut their spending to save more. If you like a more hands on approach to budgeting, there are budget templates that you can purchase for as little as $5. You’ll have to manually input your data, but the budget template will perform the calculations and analytics for you. If we end up in a recession in the coming months, budgeting is one of the essential steps to prepare for a recession.
Consider Extra Income
If the budget above reveals that you’re not in a secure financial standing and you’re unable to save, consider getting a second job. Gig jobs like Uber and Lyft are always offering up new opportunities with little to no barriers to entry. This does not have to be a long-term solution but rather a temporary one to achieve your savings goal before it’s too late. Additionally, if you do lose your main job in the next 12 months, you’ll still have your side hustle to rely on. The recession is not here yet and there may not even be one. However, it can’t hurt having more money in your pocket.
Increase Your Emergency Fund
An emergency fund is an integral part of any financial plan regardless of your income. This is money you put aside for future use in case of an emergency. The main objective of this fund is to avoid going into debt whenever some unfortunate unforeseen event happens that requires immediate financial attention. A recession increases the chances of being unemployed for a prolonged period and therefore could require much more money than you currently have saved. If there is room in your budget, it would be prudent to save more than you usually do so that you can survive without income for at least 4 – 6 months. Having an adequately funded emergency fund is one of the essential steps to prepare for a recession.