6 Ways to Prepare Your Finances for a Recession

If you have been hearing the news these past weeks, you have heard the word recession more than a few times. What is a recession, and how do we prepare for a recession? 

The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity spread across the economy, and that lasts more than a few months.” A recession means our economy is slowing down, companies are laying off employees, and consumers are spending less. 

We will focus on how to prepare for a recession and help you create a plan to see this recession through. Reach out to Your Money Line about economic collapse preparation, and having an action plan is essential.

Are we going into a recession?

We can only confirm we are in a recession in hindsight after we have seen a decline in sales, GPD, production, and an increase in unemployment. 

Some economic signs are the value of goods and services produced in the US.  In the last two quarters,  our GDP has declined. Other factors go into consideration, including job losses or the unemployment rate, and consumer spending. 

Start preparing for an economic collapse today. We want you to use your resources to plan and create a plan to ensure you survive this recession. This might look like having an emergency fund, paying off your debts, starting sinking funds for those nonrecurring expenses, and considering how to increase your income if needed. Being prepared can help ensure that your finances survive a recession. Ultimately, you will be in a better financial position even if we don’t go into a recession. 

How to prepare for a recession

You’ve heard about a looming recession and are starting to think about what’s next. How can you start preparing for a recession? You might have thought, even if this doesn’t happen, I still want to know how to be prepared for a recession. You’re right. It doesn’t hurt to be prepared! The more prepared to face the uncertainty, the easier it will be. 

1. Reconsider your job situation

One way to protect against a recession is to take a good look at your job. What industry are you in? How is your company doing? 

Even if you haven’t, it's time to get your resume up to date, but more importantly, reach out to members of your network just to say “Hi, and see how they are doing.” Keeping up with your network and building and fostering those relationships with others in your field can be mutually beneficial.

Surviving a recession might involve staying in touch with former colleagues,  being flexible, and having your resume up to date and ready to go. 

2. Cut down on your spending

In a recession, you want to ensure your money is accounted for and your spending dialed in. Knowing you have your necessities covered can give you a sense of stability during unstable times. Here are some ways how to save money during a recession. 

First, look at your budget, and review your spending. You’re looking to cut or reduce your spending in categories that are your wants or would like to have. – eating out, gym memberships, and subscriptions. 

Second, anything you remove or reduce can be added back later if you find that you truly miss it. 

3. Set up an emergency fund

Surviving a recession is about being prepared. An emergency fund can help you weather the storm and navigate the unknowns that can affect you financially, like a job loss, and medical costs, to name a few.  

Do you have an emergency fund? You do, that’s great! With inflation and the cost of everything rising, it’s time to review your expenses and ensure that you have enough to cover 3-6 months of your expenses. 

If you don’t have an emergency fund, it’s a good time to start one. Let’s work on building your savings fund. Use the funds you saved from reducing your expenses to start your emergency fund.

Focus on opening a savings or high-yield savings account and make those deposits. Start with what you can and continue until you reach your goal.

4. Pay down your debts

Paying down your debts gives you more cash flow once you’ve paid your debts. This is important if you want to survive a recession; you want liabilities and enough cash to cover your expenses for a few months.

The key to paying down your debt is having a plan. We like to use the Momentum Method, which involves systematically paying off one debt at a time while making minimum payments on all other debts. 

You start by paying off the smallest debt you have first. You can throw as much extra money as possible toward the smallest debt while paying minimum payments on all other debts except the smallest one. This will cause the smallest debt to go away quickly, which helps you stay the course. 

5. Rebalance your portfolio

An investment plan that works for you and your goals is essential to your financial wellness. Understanding your goals and the time frames you’ll need the funds. Is it a short-term or long-term investment? Knowing this can help you choose suitable investments to meet your goals.

The stock market is currently down, and you might be questioning your investing plan. It’s easy to say you have a high tolerance for risk while the market is on an upward cycle. It’s a whole different ball game when you see your investments take a hit. 

Are your investments keeping you up at night?  Your Risk tolerance maybe isn’t what you thought it was. That’s ok. Ensure you communicate your comfort level with your financial planner/advisor. If you manage your portfolio, it’s time to review it and ensure your allocations align with your risk tolerance and goals.   

6. Convert funds to a Roth IRA

If you were planning on converting funds from a tax-deferred retirement account, like Traditional IRA, into your Roth IRA, right now is a good time to do so. The market is downwind, making it a good time for these conversions. 

Transferring funds from a tax-deferred account, such as a Traditional IRA, into an after-tax account, like a Roth IRA, creates a taxable event. Because you haven’t paid taxes on the contributions made to the Traditional IRA account, taxes will need to be paid for this transaction, and since there are reduced gains right now, the amount of taxes for those gains is less. 

When it’s time to withdraw your funds from the Roth IRA, those withdrawals will be tax-free.

Recessions affects companies, too.

Companies also feel these effects, including lower demand for their products and services, which translates into fewer sales, less revenue, and decreased profits. 

Companies can prepare by staying flexible and adjusting as demand changes.

They can review their finances: what assets and liabilities do they have, and how can these be used to be in a better financial position? How much debt does the company have? The more leverage a company has, the more cash it needs to make payments and keep it afloat. Consider taking a closer look at expenses: what can be reduced or eliminated?

Being Prepared for a Recession in 2022

Understanding your finances and a plan will be critical to surviving a recession in 2022. The tips shared can give you some control and stability in your financial life, allowing you to withstand better the volatility and uncertainty we face. 

Your Money Line is here to help you through these uncertain times. We understand what is going on in the markets, but more importantly, how this relates to you and the impact it can have on your employees' financial well-being.