Recessions come and go, but with the instability of modern markets, we’re bound to experience a recession at some point in the future. How does one prepare for such an event? A recession can be damaging to businesses and individuals alike, but luckily, there are ways to prepare yourself. Here’s how to recession-proof your finances to ensure you don’t fall into financial ruin during the next recession.
- Emergency Funds
Pretty much any financial advice column will mention an emergency fund as a vital component of financial help, and for good reason. Having a fully-funded emergency fund can mean the difference between disaster and perseverance in the event of a recession. Should you be laid off during the recession, you’ll likely be out of work for several months. How will you feed your family or pay your bills if this should occur?
An emergency fund should be an accumulation of at least three months’ worth of expenses (though six months’ worth is probably a better option). The money is best stored in a high-yield savings account where you won’t be tempted to use it except in case of an emergency. This fund should be absolutely off-limits until the direst of needs strike.
It’s best to store your emergency fund in a different financial institution than your personal bank. Seeing such a large balance in your account can lead to temptation, and before you know it, half of your emergency fund was spent on a luxury vacation.
- Minimize Your Debt
When recession strikes, you’re going to be focused on providing basic necessities for you and your family; not extra debt. If you’ve accrued a lot of debt in your lifetime, it’s important to get it paid off as soon as possible. In the event of a recession, you’ll likely fall behind on payments, incurring late fees and other penalties that only serve to increase the overall amount that you owe.
You don’t want to have to worry about paying off credit cards when you’re struggling just to get groceries for the week. Reduce your debt each month by cutting costs and putting more towards the cause. Whether you’re working with vehicle loans, high-interest credit cards, or some other debt, paying off your balances should be a top priority for you.
- Understand How You Make Your Money
Understanding how you make your money can help you make better financial choices during a recession (and afterward). You’d be amazed at just how many people don’t truly understand their cashflow, or how it affects their overall financial picture.
If you need help getting to know your finances better, or planning for a more secure financial future, you could benefit from the services of a CFA, or certified financial advisor. A professional set of eyes will help you identify key issues in your finances and planning, and get you back on track when you’ve strayed from your goals. Read this list on Careful Cents to learn about the best financial advisors and what they have to offer.
- Have a Backup Plan for Employment
Time to dust off your resume! In the event of a recession, there’s a good chance your company may begin laying off workers; and you could be among those that don’t make the cut. Even if you’ve worked somewhere for many years, you could still be laid off to mitigate company costs.
It’s important to prepare for such a possibility by updating your resume and having a backup plan in place. There may be other companies looking to hire, and if your job isn’t planning on re-hiring once the recession is over, this may be your only option for steady employment.
Many of us don’t update our resumes over the years, especially if we’ve worked at the same company for a long time. Keeping your resume updated is an important part of planning for a recession and ensuring your finances take minimal casualties during the event.
- Don’t Panic!
Recessions can cause a lot of anxiety, but the reality of it is that media sources hype up such events. While a recession is certainly a serious thing, it’s never quite as serious as it’s made out to be on the news. The best thing you can do is find a non-biased news source that doesn’t focus on hyping up stories, or simply turn off the news now and then. Panicking is about the worst thing you can do in this situation, as it only serves to heighten anxiety and cloud judgment.
If you’ve got money tied up in assets that are going to take a loss, it’s going to happen no matter how much you panic. Yes, you’re going to lose money, but it can be recovered. Your sanity and mental health are a lot more difficult to recover than a few thousand dollars!
Stay calm, prepare yourself for losses, and wait out the storm. Recessions are out of anyone’s control; they’re a natural occurrence that markets experience when conditions are right.
Recessions are an inevitable part of an economy and something we have no control over as regular citizens. From the stockbrokers in New York to the miners in Nevada, everyone is affected by a recession. Luckily, you can follow these steps to keep your finances and your sanity under control during a recession.
Disclaimer: This content does not necessarily represent the views of IWB.