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Recession-Proof Your Money Life

November 7, 2022
Recession-Proof Your Money Life

Despite positive economic signals including a strong job market, red flags such as a declining U.S. gross domestic product (GDP) and high inflation suggest the nation might be in for an economic slump. While predicting if, when, or how deep of a recession we could be facing is elusive, with inflation eating into budgets and rising interest rates increasing the cost of credit, how can you protect your money?

Whether or not the country enters a recession in the coming months, taking these 12 steps will help you know how to prepare your finances to handle inflation and weather economic uncertainty.

1. Revise your budget.

Review your spending over the past few months. Thanks to inflation, you’re probably spending more than you used to, but you may not have realized just how much until you see the numbers. Adjust your budget to bring expenses back in line. You may need to budget a larger part of your income for essentials, such as groceries and utilities that are rising in price, and cut back on extras like streaming services or restaurant meals. Once you’ve revised your budget, track your spending going forward to keep yourself on course. If the cutbacks feel painful, remind yourself they don’t have to be permanent—they’re just temporary measures in case of a recession.

2. Cut your energy costs.

Heating and cooling account for 35% to 40% of a typical home’s energy use, according to the U.S. Department of Energy. Try these energy-conserving tips for quick wins:

  • Turn the thermostat down (in cold weather) or up (in warm weather) by 7º to 10º F while you’re at work.
  • Seal air leaks around windows and doors by caulking or weatherstripping.
  • Insulate your water heater and turn its thermostat to 120º.
  • Unplug electronics when not in use.
  • If your appliances are over 10 years old, consider replacing them with ENERGY STAR certified models.

Look for federal, state, local, and utility incentives, including tax credits or rebates, that can help pay for energy-saving appliances or home upgrades.

3. Build a solid emergency fund.

Pay yourself first by putting a percentage of your take-home pay into savings each paycheck. You can set up a recurring transfer into your savings account to build your savings effortlessly. Aim to save at least three months’ worth of essential expenses (rent, groceries, utilities, etc). Depending on your circumstances and access to other financial resources, you may want to set aside even more, for example, if you’re not eligible for unemployment benefits or are a single-income household. Tap these funds only in a true emergency, such as if you get laid off or for an unexpected medical expense not covered by insurance.

4. Pay down high-interest credit card debt.

The Federal Reserve has raised interest rates several times this year to fight inflation, and more increases may be ahead. And since interest charges, or annual percentage rates (APRs), on most credit cards rise and fall with the prime rate, the cost of carrying a balance is also rising. To avoid accumulating interest charges, try dedicating some money to paying down credit cards, using the snowball method or other debt reduction strategies.

Do you have several cards with high balances? Depending on your total balance and the terms on those credit cards, you might save money by consolidating credit card debt into a personal loan with a lower interest rate. Use the loan to pay down the cards; then be sure to make the loan payments on time.

If you have good credit, shifting your balances to a balance-transfer credit card with a 0% introductory APR is another option. Once transferred, your balance won’t accrue any interest during the introductory period, giving you time to pay down the debt. Just be sure not to accumulate any new debt to any of these cards until you pay off the new card.

Don’t have credit card debt? Keep it that way by limiting credit card use and paying your balance in full each month.

5. Look for ways to earn extra money.

Boost your emergency fund by getting a part-time job. Consider working nights or on weekends at a restaurant, coffee shop, or retail store. These industries are in desperate need of employees right now and have increased their average hourly wages as a result of a pandemic-fueled labor shortage. Retail employees typically get an employee discount, so working somewhere you can buy necessities, like a big-box retailer or grocery store, can earn and save you money.

Would you rather work for yourself? Look for a side hustle like tutoring, dog-walking, driving for a ride-share or delivery service, selling clothing or crafts online, or freelancing in your current field. Not only will you earn extra money to pad your emergency fund, but you’ll have an income source to fall back on should you get laid off.

6. Rethink big purchases.

Ongoing supply shortages and inflation mean prices on major purchases like home electronics, furniture, appliances, and cars are soaring right now. Unless a big purchase is essential (for example, your computer or refrigerator died), put off purchasing big-ticket items until you’re on firm financial footing. If you need to buy now, investigate used, returned, floor model or refurbished products. You can find these deals at retailers, manufacturer websites, on social media marketplaces, or at local consignment stores. Be sure to check the condition of the product and ask about any warranties available.

7. Keep your skills sharp and resume polished.

Layoffs typically accompany recessions, and despite a strong job market, in one report, 50% of employers surveyed in August are reducing employee headcount. While you can’t control the economy or your employer’s personnel decisions, you can keep the lines of communication open with your boss, be sure your work is aligned with company priorities, and make it clear you’re there to support the team. You can also update your LinkedIn® profile and reconnect with people in your professional network to build visibility.

Look for ways to improve your skills through continuing education through local colleges, professional associations, or online courses. Your employer may even pay for job training if you can demonstrate it will add value to the company.

8. Experiment with living on one income.

If you’re a two-income family and one partner is laid off, it can be a big financial blow. Prepare for this possibility by experimenting now. While you’re both still working, see how close you can get to living on only one income and figure out if it’s enough to at least cover your essential expenses. During the test period, you can put the other partner’s income toward building savings, paying down debt, and achieve other major goals you set (such as starting a business or moving closer to family). Ultimately, learning how to live beneath your means by living on only one income in a dual-income household can bring greater flexibility, options, and peace to your everyday life.

9. Maintain your physical and mental health.

During times of economic stress, it’s important to stay physically and mentally fit. Take care of yourself by making time for regular exercise that you enjoy. Work out with your partner or a friend to add socializing into the mix: Exercise and social interaction are both good for your mental health. You can also take advantage of mental health services your employer may offer, or download a relaxation or meditation app to help you reduce anxiety and unwind.

10. Think long-term and diversify investments.

It’s natural to worry when you see a drop in your 401(k) or brokerage accounts. However, remember that unless you’re about to retire, these are long-term investments and market downturns provide opportunities to buy quality investments at reduced prices. Before making any hasty changes to your portfolio, get professional advice from your plan administrator or financial advisor. Diversifying your investments in accordance with your risk tolerance and retirement timeline can reduce the chances that a downturn in any given industry, geographic region, or investment instrument will drastically impact your entire portfolio.

11. Investigate government and/or community assistance.

You may never need it, but if you research financial assistance from the government and other sources now, you’ll know where to get help in a financial emergency. Some states are still giving out stimulus checks for COVID relief; use yours to build your emergency fund or pay down debt. Find information about federal government benefit programs, including COVID-related assistance, on USA.gov. Visit your state and city government websites for information about programs in your area or visit 211.org to find a variety of assistance nationwide. Also check what local houses of worship or charitable organizations have to offer.

12. Maintain good credit.

If you decide to get a personal loan to pay down high-interest debt and prepare for a potential recession, you’ll need good credit to qualify for the best offers and lowest rates. Now’s the time to get your credit into shape. Check your credit report from each of the three major credit bureaus—Experian, Equifax and TransUnion—for free at AnnualCreditReport.com. Make sure they’re accurate; if not, contact the credit bureau to request they correct any errors. Visit the Consumer Finance Protection Bureau website to find out how to get your credit score for free.

The Bottom Line

Maintaining good credit, having a budget, saving for an emergency, thinking long term, and keeping your job skills sharp, are all smart moves to make in a challenging economy. Belt-tightening measures like delaying purchases or getting a second job demand a bit more sacrifice, but they’re usually only temporary. No matter what the economy and inflation does (or doesn’t) do over the next 12 months, making sure you and your money are ready for anything will mean greater peace of mind knowing you’ve done all you can to prepare yourself and your family for whatever may come.

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