How You Can Prepare Your Finances for a Potential Recession

A recession is a decline in economic activity that often leads to higher unemployment and less economic growth. This can occur for various reasons, including inflation or a crisis in a large industry, such as the real estate crash that led to the economic recession in the late 2000s. While you aren’t likely to accurately predict a recession, there are things you can do to fortify your finances against the negative effects of one. 

Understanding How a Recession Occurs

A typical recession occurs whenever there is a stoppage of economic growth, and the economy shrinks in size instead. No one can accurately predict when a recession will happen, though many signs lead people to speculate that one may be on the horizon. Recessions also come in various sizes that lead to many potential impacts for consumers and businesses. 

Some recessions do not have a huge negative impact, and the economy can bounce back fairly quickly, even though there was a rise in unemployment and a decline in economic spending. Others are the ones that most people fear, similar to the 2008/2009 economic recession that led to the housing crisis and many people being out of work for an extended period of time. 

While you can’t always predict when the recession will occur or how hard it will hit, you can prepare your own personal finances by taking certain measures. This can help you survive a recession and ride out the negative economic impact. Here are some of our best tips for preparing your finances for a potential recession if you fear one might come.

Live on a Budget, Now

If you expect uncertain financial times, there has never been a better time to create and live by a budget. This can help make you disciplined, and you can find ways to eliminate unneeded costs. There is likely some percentage of your income that you’re spending on things that aren’t needed. Creating a lean budget can help you keep more money in your accounts to save for a rainy day in the event that the recession does come. It can also help make you more disciplined for the future.

Increase How Much You’re Saving

You can probably increase the amount no matter how much you’re currently saving. When you fear a potential recession, it’s a good time to increase the amount you’re saving to have more money available in your emergency fund. If a recession hits you personally and you lose income or end up with a large expense as money gets tighter, then having more in your emergency savings will go a long way to helping you survive the downturn. The more you save before the recession hits, you’ll likely be better off.

Eliminate High-Interest Debt

If you have high-interest debt that you’re paying interest on every month, now is the time to see how you can pay it off quickly. Paying a large amount of interest during a bad economy can be too hard for many to handle, especially if you end up without employment. Paying the debt off can save you money now that you won’t have to pay, but it also might provide you with more available credit to help you navigate the bad economic times.

Invest in More Conservative Investments

Many people find a recession a good time to invest because the costs get lower. Those that still fear how far investments might fall will be better off investing in more conservative options, such as real estate or federal bonds. This can protect your money while you’re still able to earn a return on your investment. 

However, this does not mean that you should sell current assets in the market because you could lose money on those investments, but history says that the market will climb back up again. Instead, invest your extra savings into safe investments while you wait for the economy to recover.

Evaluate Your Housing Situation

Preparing for a potential recession is a great time to evaluate your current housing situation. If you own a house, you may be able to refinance your home to lower your payment. If you’re renting, then consider buying a house or finding a rental home that is more affordable during the economic downturn. Aiming to reduce your monthly expenses as much as possible is key to surviving a recession while still on a good financial footing, and your home is likely your largest expense.

Increase Your Available Credit

In case times get tough, increasing the amount of your available credit can go a long way when you have no other financial options. For example, if you lose your job, you’ll not get approved for a new loan and will have less money to pay for your life. In that scenario, if you exhaust all your savings, then having available credit can help weather the storm for a bit longer while you look for additional income. 

Bottom Line

There are a lot of options available that you can choose to help protect your finances from the downturn of the economy. Following these tips can put you in a better overall financial position and prepare you to take a heavy financial hit for an extended period of time. Being prepared can help alleviate some of the frustrations and fear that potential recessions can bring to consumers.