The idea of a recession seems to have become a word that brings with it feelings of dread and even fear. It’s easy to see why, to a certain extent. After all, with a recession comes job loss, stock market crashes, high inflation, and all sorts of economic turmoil. However, as bad as recessions may be, there are always steps you can take to help mitigate your loss during a recession. In fact, it’s even possible to come out of a recession stronger than before. Now, let’s get into how you can recession-proof your finances!
What Exactly Is A Recession?
Defining a recession can be hard, and noticing one can be harder – particularly if you’re in the beginning stages of one. To put it simply, there are ups and downs in the economy over time. For quite a while we were having record highs in the stock market and our economy, followed by a rapid crash and slow build back up. Those major dips in our economy’s performance can be a great indicator of a recession, and if they’re bad enough they may be indicative of a depression. However you want to look at it the fact is this, a recession is a low period in our economic prosperity and stability.
In a recession there is often a drop in the value of your currency, for multiple reasons. Trade may be hurting, the housing market may be in shambles, and production and manufacturing could be at a standstill. Consequently, this can also cause a shortage of jobs, as companies can no longer afford to hire as many workers as they previously could.
Obviously, if that happens to you, it can cause major problems for your household. That’s why it’s best to always be prepared for a recession – to avoid or at least soften the blow of any sort of financial catastrophe.
8 Steps To Start Recession-Proofing Your Finances
There is no way to be completely secure or recession-proof no matter what. However, if you follow these 8 steps you’ll be better off than the overwhelming majority of people. Now – let’s get into the steps to start recession-proofing your finances.
1. Increase Your Emergency Fund
I hope this goes without saying, but to secure yourself from financial disaster it’s crucial to work on strengthening your emergency fund. How much you may need to put in your emergency fund varies, but six months worth of expenses is a good starting point. If you work in a volatile industry, it may be better to save 12-18 months worth of expenses. It’s important to be honest with yourself and look at the facts of your current main source of income.
If you need more help on figuring out how much to save or how to start saving for it, check out my article on emergency funds. Of course, if you hate the fact that you don’t earn much money off of cash in your checking and savings accounts, check out Axos Bank. They have some of the best interest rates in the market right now, making them a great choice for emergency funds.
2. Build A Diverse Portfolio
Everyone seems to get the idea of investing in a diverse portfolio, but very few people actually practice this regularly. Fortunately, these days it can be pretty easy to have a high-performing, yet incredibly diverse portfolio. The key is this – invest in some strong index funds and ETFs. Index funds and ETFs have a record of outperforming even most professional traders. If you don’t know what an index fund is, or why they’re so good, check out my article breaking them down here.
If you know what index funds and ETFs are, but aren’t sure how to get started investing in them, I wrote a guide that can help you go from nothing to a funded, diverse portfolio in only minutes. For those of you who didn’t know, M1 Finance is my favorite brokerage for investing in index funds and ETFs – it’s easy, fast, super simple, and doesn’t have extra fees like a lot of other platforms.
Diversity Means More Than Just Focusing On Index Funds
Of course, your portfolio can have more than just index funds and ETFs if you want. Real estate is an amazing market, and any investment portfolio is well served by having some skin in that game. If you want more information on real estate, I interviewed one investor who lives quite comfortably just off his real estate investments. Cryptocurrency can also be part of a diverse portfolio. Personally, I keep my crypto allocations to around 5-8% of my total portfolio at most.
With all of that being said, I have a couple more tips about your portfolio. First, be careful of investing too much money into the industry you work in. If that industry is negatively impacted by a recession you don’t want to lose your investments and your job. Second, if the market crashes, do not panic and liquefy your assets. If it has already crashed, hold onto it and play the long game – more likely than not you’ll make it all back as the market rebounds.
3. Budget
Living off less than you make is a huge key to building wealth and keeping it. Unfortunately, it also means that you may have to cut back on certain things you enjoy and monitor your spending. On the bright side, budgeting makes all of that much easier. Want to make a budget so that you’ll be more than prepared for the next recession? Check out my beginner’s guide. If you want an advanced take on budgeting, that can help if you’re really trying to take your finances to the next level, look into starting a zero-based budget or try to tweak your budget and find what it may be missing.
Do your best to make your income far greater than your expenses. The bigger that gap, the better off and more secure you’ll be. If you really struggle with saving and budgeting, try using the Acorns app. It’s great for beginners – it teaches you a lot of the basics and it automatically starts saving money for you. Plus, you get a $10 bonus if you sign up through this link. It’s one of the best options for people just starting out.
4. Eliminate Major Debt
No, you don’t need to eliminate ALL debt like your mortgage. You do need to try to get rid of all high-interest debt though. Think of debt related to credit cards or even your student loans. For me, any debt with an interest rate over 5% is a top priority. That’s part of the reason I never hold a balance on a credit card. If you need help getting rid of your debt, I’ve got you covered. Check out my article on the snowball and avalanche methods. I’ll help you figure out which is better for you, and then you can use that strategy to get rid of debt once and for all!
5. Create Multiple Sources Of Income, But Live On Only One
Creating several sources of income will take your financial security to the next level. In fact, it’s also one of the best indicators for wealth too. You don’t need to go crazy and work until you drop. It’s okay to get creative with it and have some fun, as long as you get in some additional income for your household. I’ve written numerous articles on this topic, from lucrative side hustles to ways you can make money online. Find one or two ideas you like and run with them.
Your extra sources of income aren’t limited to side hustles like consulting either. Cash flow from something like rental properties still counts! So, focus on building up a few sources of income for your house. The goal is to be able to live off of one, and for the others to help you exponentially increase how much you can regularly invest. Also, if you lose your main source of income, those additional sources can soften the blow and even keep you afloat until you can get back on your feet.
6. Prepare Your Career For A Recession
I’ll admit, this step is somewhat vague and doesn’t apply to everyone – so I’ll keep it short. If possible, do your best to make your job recession-proof. There are several ways to do this. You can pick a career that always has jobs available, become so great at it that even if you have to take a pay-cut you can still find work, or shift to another company or role that is more secure. During economic downturns I’ve seen a lot of engineers take on jobs that are less “fun” for them, but offer more long-term stability.
In that example, working on the cutting-edge stuff may be what they want to do, but sometimes working on solutions that are less interesting to them can help them make it through a recession. Of course, don’t do a job you hate (passion certainly isn’t everything, but it isn’t a bad thing either), but be sure to consider all of your options if push comes to shove.
7. Cut Back Your Expenses
We’ve already covered why you need a budget, so you should understand how important this can be. When times are hard, you may have to find areas you can cut back – be prepared for that. A few minor expenses may not add up to much. Keeping yourself from an occasional coffee or a streaming subscription may actually drive you crazy and do more harm than good. It is important to spend a little on yourself every now and then, after all.
However, once you’ve made a budget, monitor it and see if you can find places where you can cut your expenses drastically. Everyone’s spending is different, but the biggest places you can cut are usually related to housing, food (particularly eating out), and transportation. More often than not, people have a car or house they can’t afford, and many Americans eat out far more than is wise.
Of course, it’s possible you’ve made the mistake of going overboard in all 3 categories, and aren’t cutting any corners. Either way, it’s always a good idea to keep an eye on your budget and know what you can cut if you must.
8. Develop More Skills
Obviously, developing more skills is always a good thing. It’s also crucial to being able to handle a recession though. The more you educate yourself, and the more skills you develop, the more tools you have at your disposal. If your industry takes a hit, you can potentially move to another one or leverage your skill set to more easily get another role. Alternatively, those skills can help you develop additional sources of income like a side hustle or even a business. In other words, your education should never end. Focus on getting your hands on some educational material and start applying what you learn.
Prepare For The Unexpected
As great as it would be if we could always predict the next recession, we can’t. That’s why it’s important to always be prepared for one. No, that doesn’t mean you need to live in fear or with constant anxiety. Instead, just focus on these steps, which will help you get your finances in order, and you’ll start seeing rapid growth – and you’ll be prepared when you do have to deal with another recession. If you follow good financial habits when things are going well, then it will be a lot easier to recover from disasters.
Conclusion
There we have it – 8 steps to help you prepare your finances for the next recession. Remember, the biggest issues when it comes to recessions come from not taking the steps to prepare yourself properly or from being ignorant of the situation and driving yourself into a panic. Relax, focus on what you can control, and you’ll be able to mitigate a lot of damage to your personal finances. I hope you learned a lot from this article. If you have any other tips to add, or had an experience to share, be sure to leave a comment.
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