How to Prepare Your Finances for a Recession

Recession

Are we headed toward a recession? No one yet knows, but it’s never too soon to plan your financial strategies for a recession.

Many economists and experts also ask if a recession is on the horizon. As evidence, they point to the many consumers struggling with inflation, while the Ukrainian conflict and supply chain challenges affect the global market.

The last recession dates back to 2008. Employment rates plummeted, investors lost their savings, and homeowners found themselves unable to keep up with their mortgage payments.

While weathering a recession can be a personal and financial challenge, experts argue that these periods of the economic downturn are part of a cycle and ultimately lead to expansion or growth.

Recessions can be hard to predict, but you can take steps to recession-proof your finances in case of a downturn.

What Is a Recession?

In the past, the National Bureau of Economic Research defined a recession as a consecutive period of two quarters with a decline in the gross domestic product (GDP). The revised definition looks at other factors that indicate a widespread downturn in economic activities over a few months. These factors include the GDP, employment numbers, production from the industrial sector, retail sales, the average income, and more.

The effects of a recession can be devastating. For example, at the worst of the 2008 recession, unemployment reached 10%, home prices fell by 30%, and the S&P 500 index lost 57% of its value. Moreover, historically speaking, recessions have resulted in missed opportunities for consumers and businesses alike, with fewer jobs, higher prices, and limited capital available for investing.

Experts believe we could be headed for a recession due to inflation reaching 8.5% and slowing down demand. At the same time, stagnant wages can’t support consumption, and consumers don’t have much of a budgeting margin with a combined $15.85 trillion in household debt.

Financial Strategies for a Recession

Whatever happens in 2022, it’s better to be on the safe side. Consider adopting these sound financial strategies for a recession.

Save Up for an Emergency Fund

Besides providing you with peace of mind, an emergency fund can help you cover unexpected expenses without having to increase your level of debt. The Fed recently raised interest rates, and this trend could continue if inflation keeps climbing, making borrowing more expensive.

An emergency fund can also help you meet your financial obligations if you lose your job.

Start with a simple goal, such as saving $1,000. Then, keep adding to your emergency fund until you have enough to cover three to six months of living expenses.

Review Your Budget

Recession or not, it’s always smart to understand where your money goes and look for ways to cut unnecessary expenses.

Taking control of your budget means you might be able to put more money aside for your emergency fund or for other goals, such as saving for college or retirement.

Start by calculating your monthly income and make a list of all your expenses. Next, look for expenses you can reduce or eliminate. At the same time, set budgeting targets. For example, put aside a certain amount every month to cover essential expenses and meet your saving goals.

A common practice aims to spend 50% of your income on needs, 30% on things you want and put 20% aside. However, with the possibility of a recession, you should rethink the 30-20 rule and save 30 to 40% of your income as you reduce spending on wants.

Prioritize Stable Investments

A recession usually results in a volatile market, like the Dow Jones losing 774 points within a single day during the stock market crash of 2008.

As an investor, you can prepare your portfolio by focusing on stable investments, like bonds and mutual funds. Certificates of deposit, money market accounts, fixed annuities, and even some preferred stocks can also be good options.

The worst mistake you could make is panic and pull your funds from financial markets. Instead, it would help if you were smart about your investment decisions. For example, rethink your risk tolerance and build a balanced portfolio.

Recessions can limit growth opportunities, but you can still find worthwhile investments in economic sectors that continue to thrive, including tech or health care.

Consider Job Security

Job loss is a scary prospect. In fact, 44% of people consider job security the most essential thing in a job.

Unfortunately, a recession can reduce profit margins to the point where employers have to lay off workers. You can reduce risks by finding ways to make yourself more valuable at work, whether through seeking an internal promotion or taking on a leadership role.

However, this approach won’t protect you if your employer goes under. It’s a harsh reality, but an estimated 1.8 million small businesses closed as a result of the 2008 recession.

It would help if you started thinking about the possibility of re-entering the job market. First, assess your marketable skills. Then look for ways to acquire more skills with new experiences at work, professional certifications, and online education.

Stay Positive and Plan Ahead

Living through a recession is undeniably a challenging experience, but it’s critical to remain positive and stick to your plan. Making a plan for this potential future can help you prepare more easily mentally and financially for this difficult period.

Going over your finances is a great place to start. If you don’t have a budget or saving strategy now, these two things should be priorities. However, it’s also important not to lose sight of your long-term financial goals, such as saving for retirement or your children’s education.

One of the best financial strategies for a recession is choosing the right financial partners. You need access to the expert advice you can trust, from investing to saving to getting out of debt.

Prepare for the Future with Power Financial Credit Union

With almost 35,000 members, Power Financial Credit Union is a trusted financial institution focusing on helping guide its members to better financial lives now and for generations to come. We can help you prepare for a recession and manage your finances more effectively with products like affordable loans, money market accounts, savings and checking accounts, and more.

If you live, work or go to school in South Florida, get in touch with us today to learn more about our products and services.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.