Given all the hoopla surrounding each recession, it’s surprising that we don’t spend more time prepping for them. Recessions are a normal part of the economic cycle, a chance for the economy to slow down and reset. While we’re not currently experiencing a recession, we can count on it happening again, and that means we can begin to prepare. Whether there’s a recession in 2024 or the next serious economic downturn holds off for several years, now is a good time to make plans.
1. Inventory your budget
If you’re someone who’s managed to get by without a monthly budget, you may want to rethink that strategy. Budgets do more than remind you when bills are due. A good budget will also help you quickly ascertain the following:
- How much cash do you have in your checking account?
- How much are your basic living expenses, including your home, food, health insurance, child care, and transportation?
- Have you developed additional sources of income? For example, do you have a side hustle or a way to quickly boost your income?
- What kind of debt do you have? How many of those debts carry a high interest rate?
- How does your savings account look? How long could you live on the money currently in your account?
If you don’t currently have a monthly budget that helps you stay ahead of your financial situation, it’s easy to build one, either on paper or through a budgeting app. You can’t know precisely where you stand until you’ve taken a full inventory of your finances, and a budget is the easiest way to do that.
2. Build emergency savings
The truth is, you may never need to access your emergency fund, but you’ll definitely be able to sleep more soundly knowing you have money to fall back on.
The general govern of thumb is to put enough money away to cover three to six months’ worth of expenses. Again, this is where a budget comes in handy. If you’re not sure how much to save, this emergency fund calculator can help.
3. Adopt a hands-off policy for your investments
Nothing sets media sources buzzing faster than a recession to report on. Even if you’re not directly impacted by the economic downturn, just hearing about it is enough to boost your anxiety and potentially provoke you to do something rash.
If you have investments, now is the best time to adopt a hands-off policy. In fact, investing during a recession (while stock prices are low) is a great strategy. But even if you’re not in a position to make new investments, your existing 401(k), IRA, and other managed investment vehicles are likely to plump up following a recession. That’s because fund managers take the opportunity to snap up bargain-priced investments on your behalf while values are low. Once the recession has passed and values return to normal, your portfolio will be fatter than ever.
You may also want to avoid checking your portfolio too often during a recession. What you see will not be pretty. You’re better off riding it out and waiting for your portfolio to recover.
4. Take a closer look at your job
If you have reason to believe that you could be laid off, focus on paying your monthly bills and continue to sock away any available cash. At the same time, begin looking at other job options. At the very least, find a good side hustle that allows you to earn extra cash. Whether you’re working throughout a recession or not helps ascertain how impacted you are by the encounter.
5. Keep economic downturns in mind as you make financial decisions
Even if the next recession is years away, knowing it will happen at some point is not necessarily a bad thing. Before making a purchase, consider how much debt you would be able to handle if your job was at risk.
To make life easier on yourself, make it a habit to live below your means. And if you’re in a relationship, aim to keep your monthly bills low enough for one partner to cover them on their own. That way, you have a financial lifesaver at the ready.
The good news is this: A Capital Group analysis of 11 recessions since 1950 found that recessions last between two and 18 months, with the average spanning 10 months. Better yet, the average economic expansion following each recession lasts 69 months.
In other words, don’t let the idea of recession shake you. It will not last forever. If nothing else, the threat of recession serves as a reminder to get our financial houses in order while we can.
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