Considering the current economic uncertainty, there’s been a lot of talk about an upcoming recession which can leave anyone feeling a bit uneasy. But this doesn’t mean that the sky is falling. Whether a recession happens in the next few weeks or months from now, there are steps you can take to ensure your finances are stable no matter what the economy looks like.
What is a Recession?
Everyone is talking about it, but what is a recession anyway? A recession is a period of economic decline where the rate of economic activity falls for two consecutive quarters or more. It’s characterized by falling GDP (gross domestic product), rising unemployment, and reduced consumer spending and investment.
4 Ways to Prepare for a Recession
Below are a few ways to financially prepare for a recession to ensure your finances are in order, no matter your circumstances.
Create a Realistic Budget
Creating a budget will help you prioritize your spending and understand how much money you have available each month. First, calculate your total take-home pay, also known as net income, which is the amount of money you have to spend each month. Next, list your expenses, like rent, utilities, and groceries.
Once you have a list of all your expenses, subtract them from your total take-home pay to get an idea of how much you have left to work with. Then, assign each of your remaining funds to different categories like savings, entertainment, and any other discretionary spending. Finally, track your spending to make sure you’re staying within your budget and adjust as you see fit.
Review Your Finances Regularly
It’s important to review your finances regularly to help you identify and address potential issues you may not have known about otherwise. You’ll never know if you never look. Chris Janeway, a certified plan fiduciary advisor and founder and president of Fourth Point Wealth, says, “In my experience, the greatest source of financial stress and anxiety is the fear of the unknown. We’re often terrified of digging into our numbers and finding out bad news.”
If you take the time to scan your bank account each week, you might find that you’re paying for a meal subscription service or gym membership you don’t even use anymore. Or you may discover an increase in the price of one of your streaming services. Every penny counts, even if it is $7.99.
Reduce Your Monthly Spending
Once you’ve reviewed your finances, you’ll better understand how to save money and where to reduce your monthly spending. This can include cutting back on unnecessary expenses like that daily trip to Starbucks, eating out, or shopping for things you saw on Tiktok and Instagram. Chantel Bonneau, a certified financial planner with Northwestern Mutual, says, “The best habit people can get into is knowing their cash flow and not getting themselves into a pile of debt to finance your lifestyle.”
Reducing your spending doesn’t mean you have to deprive yourself of buying and experiencing the things you love. You work hard for your money and deserve to treat yourself here and there. But before you pull the trigger on a new purchase, ask yourself these questions:
• Have I paid all my bills first?
• Have I set aside money in my savings accounts?
• Is this a need or a want?
• Will I still want this if I wait a few more weeks to purchase it?
You’ll spend less on frivolous things when you practice delayed gratification while saving more for what matters most. During this time, it’s crucial to have self-control and keep your financial goals in mind before swiping your card.
Start an Emergency Fund
Starting an emergency fund is a great way to build financial security. “The more you’re able to put aside for saving and the less debt you have, it’s going to be available to you in case of an emergency,” says Lauren Anastasio, CFP, director of financial services at Stash.
When starting an emergency fund, a simple rule of thumb is to save between 3-6 months of your monthly expenses, but if you aren’t quite there yet, you can start with a savings goal of $1,000 first.
Once you have your goal amount, open a separate saving account specifically for the emergency fund. This will help you from accidentally or impulsively spending the money on something else. Another tip is to open your savings account with another bank altogether. It takes a bit longer to transfer funds from one bank to another, which makes it less likely for you to pull funds out if it’s not an emergency.
You can set up automatic transfers from your checking account to your emergency fund on a regular basis or set up a direct deposit from your paycheck. Make sure the transfers are consistent to ensure you’re meeting your savings goals within the timespan you planned for. Finally, keep track of your progress and adjust your contributions as necessary.
The Bottom Line
Preparing your finances for a recession is an important step to take to protect yourself and your family from financial hardship. By taking the time to follow some of these steps, you’ll be better prepared for any economic downturns that may come.
