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4 Ways to Prepare for a Recession

According to Kiplinger, we have been through a recession once every 3.25 years on average since 1857. In other words, they are bound to happen every so often. So, preparing now can give you peace of mind knowing that you’ll be able to weather the storm. Let’s dive deeper into four ways you can prepare yourself for a recession:

1. Build an emergency fund

An emergency fund consists of money you set aside for emergencies, such as a car crash or a layoff. You can use it to cover emergency costs and your living expenses during the emergency.

One of the most common questions about emergency funds is, “How much emergency fund should I have?” Many experts recommend three to six months. If you have a larger family, consider aiming for the upper end.

Consider storing this money in a high-yield savings account, which earns much more than a traditional savings account. This will help you keep up with inflation and earn money when your savings aren’t needed. Your emergency fund gives you peace of mind in good times, but when a recession hits, you’ll be ready in case your job is impacted.

2. Pay off high-interest debts

High-interest debts reduce the money you have to save up for a recession and can leave you with less spending money when that time arrives. So, it’s critical to take care of these debts as soon as possible.

Consider paying off your debt using a strategy like the debt snowball or debt avalanche method. With the debt snowball, you pay off your debts in order of the principal balance from smallest to largest. This will not save you as much on interest but can help you build momentum by paying off your first debt more quickly.

With the debt avalanche method, you can eliminate your debts in order of the interest rate from highest to lowest. With this method, it can take longer to pay off that first debt, but you can ultimately save much more in interest.

3. Create and stick to a budget

Budgeting is a key piece of a recession-proof financial plan. It helps you track where every dollar is going, ensuring you don’t spend more than you have and go into debt. Additionally, it helps you find and slash unnecessary expenses. For example, you might cut out unused subscriptions you forgot about, saving you money each month. Or, you might notice you spend a lot on dining out and groceries. You could cut back on dining out until the recession is over and shift your grocery spending to more generic brands.

If you need to supplement your budget during a recession, consider getting an installment loan. With these loans, you can receive a lump sum of money upfront and pay it back in fixed monthly payments over several months or years. Installment loans can come in handy for covering everyday expenses or making a large purchase.

4. Improve your human capital

Recessions can cause companies to lay off employees in order to save money. However, you can minimize your worries about employment by upskilling. Taking new classes and learning new skills can help you to secure your job and even potentially demand a higher salary. Yet if the worst happens and you lose your job, your resume will be more marketable. Your new skills will appeal to more employers, helping you find a new job more quickly.

Prepare to take on a recession

Recessions aren’t fun, but they’re inevitable. So, it’s vital to prepare now. Start by building a three to six-month emergency fund in a high-yield savings account, then focus your efforts on high-interest debt.

Meanwhile, create and stick to a budget so you can slash expenses, live within your means, and save more. Finally, start learning new skills and improving existing ones to enhance your resume, improve your employment opportunities, and boost your potential salary. Following these steps will make you feel more secure and make any future recession seem less worrying.

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