5 Tips to Prepare Your Finances for the Upcoming Recession

A consistent decline in economic activity over consecutive quarters is classified as a recession. Recessions lead to a significant reduction in production by businesses and spending among customers. The aftermath of COVID-19’s economic effects and the current war in Ukraine has led to the disruption of the world’s supply chains leading to the declining production of goods and services worldwide. Additionally, almost all major countries, such as the United States, the UK, etc., have imposed tightening policies, which leads to credit becoming expensive, and a reduction in output by businesses.

Moreover, as businesses look to cut costs, higher rates of unemployment become common, at least for the short term. But the upcoming recession isn’t the first we’ve faced, and it surely won’t be the last. In this article by myAutoloan.com, we’ll explore a few sound financial strategies individuals can adopt to counter the adverse economic effects of a recession.

Develop a Stable Financial Mindset

While feeling stressed is a natural response to facing financial difficulties, it should not be the emotion that drives you to make decisions. Yes, the markets will fall during a recession, resulting in a decrease in the value of your investments. Does this mean you should move all your money out of the market? If you aren’t in desperate need of money, then the answer is no! In the last two decades, we have had the following major recessions – the dot com bubble (2001), the great recession (2007 – 2009), and most recently, the COVID-19 recession (2020). In the aftermath of all these recessions, the market has not only recovered to pre-recession levels but exceeded them, as reported by Putnam Investments. As a result, those who held onto their investments have seen them recover and appreciated in the long run, compared to those that hastily exited the market.

Developing a sound financial mindset takes time and will help you make financial decisions based on the benefits and cons of a situation rather than emotions. Here are a few ways to improve financial understanding:

• Read books by influential investors, such as Warren Buffet, Benjamin Graham, etc., as they provide insight into their mindset and how they manage money during economic downturns.
• Research the impacts of past recessions and recognize areas where you need to make changes which can include selling risky assets, holding onto safe investments, cutting back on spending, etc.

Review Spending Habits

During a recession, scaling back on spending is a no-brainer. The best way to keep your spending habits in check is to create a monthly budget. Here are the key aspects your budget should include:

• Provisions for Necessities: Groceries, rent, utilities, mortgage payments, and insurance payments are a few expenses you cannot do without. Hence, allocate the required amount to these areas before using your money for anything else.
• Avoiding Using Credit: As mentioned before, during a recession taking credit becomes expensive. Hence, avoid undertaking any new loans, whether it be for your car, a home, or other expenses.
• Keeping Debt in Control: Those with existing debts should work towards making timely payments. An increase in interest rates also means you’ll be charged much higher for missed payments which will create a burden on current and future finances.
• Minimize Spending: OTT subscriptions, weekly shopping, fine dining, and vacations are a few areas you should avoid spending on during a recession. Scaling back spending on these can help you potentially save hundreds, if not thousands, of dollars per year which can be put toward an emergency fund.

But, at times, you may need to spend on unplanned items such as new furniture, a cat tree for your furry companion, home appliances, etc. Before spending a dollar, take the time to conduct thorough research online by reading product reviews.

Creating a budget is much easier than it sounds, especially with the help of free budgeting apps. These apps will provide numerous pre-made templates which can be edited based on your monthly spending. Additionally, you won’t have to worry about making mistakes as the tool will do all the calculations for you.

Start an Emergency Fund

As reported by CNBC, more than 51% of American households do not have ample funds to cover three months of expenses. This is an alarming statistic that you should avoid being a part of at all costs. If you haven’t already, now is the time to start an emergency fund.

The simplest way to begin an emergency fund is to put away 20% of your monthly income towards savings. By following the budgeting strategies in the previous section, you’ll be able to save a higher percentage and build a larger corpus. Ideally, you should have enough money in the fund to cover at least six months of expenses. Given the current uncertain economic environment, having an emergency fund is the need of the hour.

Chart Your Income Sources

If past recessions are anything to go by, one should expect their job to be at risk. While planning for unemployment is uncomfortable, in this endeavor, it’s better to be proactive rather than reactive. Hence, chart your existing sources of income and find ways to create new ones. Here are the various income avenues one can have during a recession:

• Employment: Job losses aren’t uniform across industries and organizations; hence it may well be the case that you’ll continue to earn a salary.
• Dividends: Many major companies, such as AT&T and Verizon, pay dividends to investors. While it is not a given, shareholders in such companies can expect a windfall even during a recession.
• Start a Business: During the COVID recession, many industries, such as retail, struggled, but others, such as e-commerce, thrived. Those who began businesses in that niche developed a secured stream of income that kept their financials protected even during the most unexpected economic downturn in recent history. And you can do the same! Here are a few recession-proof ideas to consider:
  1. Freelance Writing: With businesses moving online at a rapid pace, the demand for skilled freelance writers is higher than ever before. Whether you’re an expert in a niche or want to write generic blogs, there are ample opportunities in the market.
  2. Accounting: Those having a skill with numbers rather than words can adopt a similar approach to helping companies keep their books balanced.
  3. Babysitting: Regardless of what’s happening in the economy, parents are always on the lookout for trusted babysitters. Here’s a list of sites where you can connect with clients and start your babysitting business.

Keep an Eye on the Job Market

As the saying goes, forewarned is forearmed. And when it comes to preparing your finances for an upcoming recession, there's no substitute for being proactive. Keeping an eye on the job market can help you anticipate which industries and sectors are likely to be hardest hit by a recession. This information can then be used to make strategic decisions about where to invest your money and how to best protect your financial assets. For example, if you think you may be at risk of losing your job, now is the time to update your CV and start looking for new opportunities — you can start with a CV template and customize it with your information. Similarly, if you're self-employed, now is the time to start diversifying your income sources and looking for ways to cut costs. By being proactive and keeping up with the latest economic news, you can put yourself in a much better position to weather a recession.

The market forces that cause a recession are beyond the control of individuals. But what one can do is educate themselves about sound financial practices, put them into practice by making a budget, keep an eye on the job market (and update that CV), and keep spending in check. Additionally, having multiple sources of income is always good; hence, finding a side business that is the right fit for you and increasing your earnings for the foreseeable future.

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