With so much speculation about an upcoming recession, it’s understandable to feel overwhelmed about your current situation and preparedness. Although warning signs point to an upcoming period of economic decline, financial experts don’t know exactly when it will happen, what will happen or how long it will last.
Recessions are officially designated by the National Bureau of Economic Research (NBER) through both qualitative and quantitative methods, like employment rate, gross domestic product (GDP) and industrial production. In reality, recessions are a normal part of the business cycle. Though the worst-case-scenario might keep you awake at night, you can take some preventive steps now to help your own situation and mitigate the effects of another recession.
1. Slim Down Your Budget
Similar to the Great Recession, new college graduates and other workers may face long periods of “underemployment,” or working in a job that typically does not require a college degree. In order to prepare for a potential loss in or stagnation of income, try to get used to living on a leaner budget now and put away the savings in a separate account.
In order to really trim down your expenses, scour through the past three months or so of your accounts to track how you’ve spent every penny. Determine your fixed expenses, savings and debt allocation and your discretionary funds allocation. If possible, eliminate as many discretionary purchases as possible and do what you can to reduce your fixed expenses. Cook your own meals, seek at-home entertainment and resist the urge to shop. If you receive any raises, bonuses or monetary gifts, put the money towards savings to keep your budget as slim as possible. Make sure to live below your means and spend less money than you make.
2. Pay Off Debts and Build Up an Emergency Fund
If you have any outstanding debt, make a concerted effort to reduce or pay off the balance, particularly for higher interest debts. The debts will follow you through a recession, making it even harder to manage if your income is reduced. That’s why you should try to pay them off while the economy and employment rate are in good shape. Aim for an emergency fund that can sustain you for a period of three to six months. If you have dependents, a home or other financial responsibilities, shoot for a larger emergency fund. You can also look for FDIC-insured high interest savings accounts to get an even better return on your invested funds.
3. Amp Up Your Earning Potential
When the economy is weak and consumer spending is low, companies are at risk, too. But if you’re dependable, hard-working and an overall star player, letting you go will likely be a very tough decision for your employer. Make yourself indispensable at work. Learn new skills, teach and help others, be a team-player and stay positive. Take on more responsibility whenever you can, and go the extra mile with each project you receive. Invest in yourself and your skills whenever possible.
You can also use the side-hustle economy to build your emergency savings faster. If you have a static schedule such as weekends or nights off, consider picking up a part-time job. You can also look for remote jobs to earn extra money whenever you have the time. Not only will another paycheck diversify your income stream, but you’ll gain more connections that may help you later down the line. Sometimes, it’s not what you know, but who you know.
4. Update Your Resume
When you’re stressed out and in a time crunch to find a new job, the last thing you want to do is something you could have accomplished while you were employed. That’s why it’s a good idea to keep your resume up-to-date at all times. Even if you love your job and feel secure right now, you might not know about your company’s recession preparedness or long-term planning. If you end up without a job, you’ll have what you need to start a job search and get back on your feet sooner.
5. Reconsider Hasty Decisions That May Affect Long-Term Investments
You may have some investments, such as a retirement fund or stocks, that can fluctuate in value over time. While it may seem like a good idea to cash out your investments in order to eliminate a loss of value in your financial reserves, a recession may only last a matter of months. In the end, a short-term solution can end up costing you more. If you’re unsure of what action to take, if any, a financial advisor can help you make more sound decisions when it comes to your overall financial wellbeing.