The state of your personal finances seems good at the moment, but how would you fare in a recession? Would you maintain that comfortable state or would you struggle? If your answer is the latter, you need to take action now and try your best to make your finances recession-proof.
A Potential Recession
Many economists are predicting that the country will go into a recession in the near future. The New York Fed recession probability indicator is suggesting that there is a 68% chance of a recession occurring in the upcoming year. That is no small chance.
Instead of anxiously waiting to see whether this prediction comes true or not, you should focus on sorting through your finances so that you’re protected from the struggles that come with a recession, like potential job loss and increased debt levels.
Build an Emergency Fund
One of the first ways to make your finances recession-proof is to build yourself a substantial emergency fund. An emergency fund is an effective tool for covering urgent, unexpected expenses without impacting your budget.
So, if you have a home repair that you have to make right away, you can make a withdrawal from your fund without worrying about how the payment will impact your ability to cover your bills, buy your groceries or fuel up your car for the rest of the month.
Without an emergency fund, you might have to rely on another method for paying off urgent expenses, like a credit card or a personal line of credit. A personal line of credit can be useful as a safety net in stressful moments when you don’t have enough savings on hand. If you don’t have one already, you can apply today through CreditFresh — as long as you meet all of the qualifications. You just might get approved for the emergency credit tool.
In a recession, an emergency fund won’t just be useful for paying off urgent, unexpected expenses. It can temporarily supplement your income if you happen to get laid off from your workplace. In the Great Recession of 2008, there were mass layoffs across multiple industries, leaving Americans across the country to file for unemployment and struggle to get back on their feet.
This is why you should strive to have at least 3 to 6 months’ worth of expenses saved up in your emergency fund. You can use these savings to pay for essentials when you don’t have your regular paychecks coming in.
Tackle Outstanding Debts
Another way to recession-proof your finances is to reduce any outstanding debts as soon as you can. If possible, eliminate the debts altogether. You’ll want to tackle these goals now, while you’re sure that you have steady employment.
How can you tackle outstanding debts? Use the avalanche method. In the avalanche method, you prioritize the accounts with the largest outstanding debts and with the highest interest rates (these have the potential to make your large debts grow even faster). Make the bare minimum payments for the remaining accounts and then put down as much as you can afford onto the largest one. The aggressive payment plan should help you chip away at the debt pile while keeping up with compounding interest.
The avalanche method is the reverse of the snowball debt repayment method. The snowball method asks users to tackle the accounts with the smallest outstanding debts and lowest interest rates first and once those are paid off, progressively move on to larger accounts. While this can be a less intimidating strategy than the avalanche method, it’s not an ideal choice for preparing for a recession.
The avalanche method will remove the biggest financial responsibilities from your shoulders. And when it comes to credit tools like credit cards and lines of credit, the avalanche method can help you bring down your balances so that you have more available credit to use when you desperately need it. This is a backup plan you’ll want to have available in a recession.
Adopt a Conservative Budget
It’s the right time to tighten your belt and adopt a more conservative budget. Try to trim variable expenses and eliminate non-essential expenses like dining out at restaurants. Taking this step won’t just help you adjust to a more frugal lifestyle, which could come in handy in the midst of a recession. It will also help you collect more savings every month, which you can put toward your recession-proofing goals of building up an emergency fund and paying down debt.
Don’t let the predictions of a recession fill you with panic. You can’t be sure that they will come true. What you can be sure of is that you have the power to fine-tune your finances so that they are recession-proof.
