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6 Tips on How to Prepare for a Recession

6 Tips on How to Prepare for a Recession

July 29, 2022

As you likely already know, we are currently in a bear market, which refers to at least a 20% drop from a recent high. Bear markets attract a lot of attention and concern (often more than necessary). On top of that, interest rates are rising, and inflation is hitting unprecedented highs. This has led many experts to say that a recession is inevitable, and that we may already be in one.

“Recession” almost sounds like a dirty word, but it’s not as scary as you may think. For starters, they don’t last forever. In fact, on average, recessions last around a year. The 2020 pandemic-induced recession only lasted three months.

Also, there are precautions you can take to prepare yourself for a recession. Financial planning is never a bad idea. Start by tackling these six things you can do proactively to protect your personal finances during a recession, and really in any economic climate.

1. Use Your Rational Mind, Not Your Emotional Mind

It is understandable to be anxious in today’s world. The media tends to overreport and blow things out of proportion, which can be quite trying on the nerves. Of course, there are also the real paper losses that you may be seeing within your investment portfolio. Averting your eyes and instead setting your sights on long-term goals is easier said than done.

Some of us have lived through past recessions as adults. A lot of the older members of our society have either been negatively impacted by previous market downturns or at least know of someone else’s horror stories. On the other hand, young adults may have experienced the Great Recession in the late 2000s, but they would have done so during their teen years. For more than a decade after that, up until the pandemic, we were all benefitting from the longest bull market in history. Both perspectives can create fear, whether you know exactly what an extended recession can do, or it’s completely unknown to you. Worrying is reasonable, but the important thing to remember is to not let your emotions cloud your decision making. This can put you in a worse position financially.

2. Revisit Your Portfolio with an Advisor

One example of how emotional decision making can negatively impact your finances is panicking and selling the stocks in your investment portfolio. Consider consulting with a financial advisor first. They may help you feel more secure in your investment decisions. Plus, they can help you diversify and rebalance your portfolio in a way that allows you to take advantage of current market conditions.

3. Beef Up Your Emergency Fund

The stock market is just one piece of both the country’s economy and your personal finances. Prioritizing your savings should always be a part of your plan, but it’s extra important in a climate like the one we’re experiencing now. A recession can change your circumstances unexpectedly but having a solid emergency fund is a good way to prepare for this possibility. If you have the means to start putting more money away now, do so.

A piece of advice that’s commonly thrown around is to have three to six months’ worth of living expenses set aside for any possible hard times. However, when preparing for a looming recession, you might want to go the extra mile. Consider your unique circumstances. One key factor in how much you should be saving is your age. Young adults may have more flexibility to adapt. For example, they’re more likely to switch jobs to increase their income or bring a roommate into their homes to offset expenses. If you already have an established and specific career, a family to care for, or a house with a mortgage, it might be best to have a whole year’s worth of savings set aside. This is also true for retirees and pre-retirees.

Savings accounts offer a worthy harbor for your emergency funds, even if they don’t generate remarkable annual interest. Most importantly, make sure that these funds are easily accessible. Scrambling to get access to them during the type of emergency you saved them for is about as stressful as it gets.

4. Spend Less, Budget More

This is a great time to either bolster your good financial habits or create some new ones. Start with your budget. If you already have one in place, you should revisit it. Take the current inflation rates into account and consider how much you’re spending. Review your bank accounts and credit card statements. Can any of the money going out be reallocated to your emergency fund for the time being?

5. Pay Down Debt

Rising interest rates may help your emergency fund, but they will do the opposite when it comes to any debts. Considering this, start by paying off your debts with any credit card accounts you may have, especially if they charge variable interest as their already high rates could get higher during a recession. This can prevent you from going into further debt and even extend the life of your emergency fund.

6. Think About Your Employment

There are a couple of reasons for this, the first being that recessions are usually accompanied by an increase in unemployment. If you don’t feel secure in your job, you fall into the category of those who should be saving a little extra right now. Also, consider networking within your industry, participating in inexpensive continued learning, and maybe even updating your resume. If you find yourself unemployed, being able to transition from one job to the next quickly is crucial for your financial stability.

You could also consider getting a side job. Unemployment is high right now, so you certainly have options. If you’re looking for a way to add more money to your emergency fund, pay off debt, or have some fun money without impacting your budget, a second source of income could help with any of those situations as well.

Basically, it’s time to batten down the hatches! Preparing in advance makes weathering the approaching storm a little easier. Please feel free to reach out to our financial advisors at any time, even if it’s just to talk. Putting your mind at ease is part of why we do what we do!