How to Recession-proof Your Life

Many Americans and economists think rising inflation, interest rates and housing costs may be warning signs of a looming recession. Unfortunately, if a recession does occur, more than two-thirds of Americans don’t feel prepared for it, according to a MagnifyMoney survey.

This article explores ways to ease the financial strain on your budget and protect your savings if a recession hits.

What Is a Recession?

A recession is a significant decline in general economic activity. The National Bureau of Economic Research officially declares when recessions begin and end. The organization defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

What You Can Do

Predictions about an official recession are divided. Regardless, you can take the following steps to prepare or stabilize your funds:

Understand your expenses. Start with examining and assessing your current financials. A line-item review of all expenses could help shed light on where you’re spending money and ways you could save. It could also help to categorize expenditures to see if there are certain areas you need to cut back on.
Stick to a budget. You will likely have to adjust your budget as you plan for everyday and large purchases, but creating a realistic budget is also important. For example, you should allocate money for fun or entertainment if you’re planning for those activities.
Live within your means. Recession or not, it’s crucial to make it a habit to live within your means. People who adopt this lifestyle or mindset are less likely to go into debt and can pivot their spending to compensate for changes.
Build an emergency fund. Having enough money in an emergency savings account is essential to pay for unexpected expenses, such as a medical issue or a car repair. The rule of thumb is to have at least three to six months’ worth of living expenses. Save with the expectation that those costs will continue to rise as well.
Save as you can. Everyday price increases are expected, so consider planning for it now. It may be more complex if you are also saving for a milestone or trying to remove excess expenses from your budget. Regardless of what you’re saving for—new car, first home, retirement— discussing your financial and investment goals with a financial advisor can be helpful. The same goes for addressing your debts or rethinking investments.
Negotiate your monthly bills. The COVID-19 pandemic has accelerated the adoption of companies’ relief policies. Providers of monthly services (e.g., utilities, phone, cable and internet) may be the most flexible and willing to negotiate bills or offer discounts, rebates or coupons.
Pay down debt. Experts also recommend consolidating your loans and paying down as much of your debt as possible. Not surprisingly, credit card debt can be even more of an expensive burden as interest rates rise.
Ensure proper insurance coverage. Insurance (e.g., automobile, homeowners, health and life) is meant to protect your financial life in uncertain times, so check the coverage on your policies and adjust as needed.

With a bit of planning, you can recession-proof your budget to ensure your needs are met. It comes down to developing healthy financial habits for today and the future.

Focus on What You Can Control

To deal with the current economic uncertainty, it’s best to focus on what you can control: your budget and saving and spending habits. It can also be helpful to discuss your situation and financial and investment goals with one of our financial planning experts.

For more financial planning resources, contact us today.