How To Recession-Proof Your Finances
- There have been a total of 14 recessions in the United States since the Great Depression of the early 1930s.
- We cannot control a recession, but we can control how we prepare for difficult financial times.
- The best way to weather a recession is to ensure your finances are in good shape.
Definition of Recession
A recession is a significant, widespread, and long-term decline in economic activity. One popular rule of thumb is that two consecutive quarters of a country's Gross Domestic Product (GDP) decline typically constitutes a recession.
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A recession can mean fewer jobs are available, so people with debt may struggle to pay it off. In addition, people tend to rely more on credit cards and loans during hard times, increasing debt ten times over. So how do you ensure your financial situation doesn't suffer during a recession?
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How to Get Ahead of a Recession
Although there are no guarantees of what will happen regarding the economy, these steps will help you get ahead of the curve and be less vulnerable during the recession.
Whether you're just starting a career or have several years under your belt, building a financial future is essential to everyone's life. But during the recession, predicting where things are heading regarding being financially secure can take time. Therefore, preparing for the worst-case scenario is more critical now than ever.
Here are eight strategies that will help you recession-proof your finances:
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1. Create an Emergency Fund
Set aside six months' worth of expenses to create an emergency fund. No amount is too big or too small. The key is to start somewhere and start with an amount you can afford. Whatever size contribution you make, you are taking action to save money for a rainy day.
If you lack the discipline to set aside money independently, set up automatic contributions for each pay period. Regularly contributing to your savings account each pay period can help you develop an essential savings habit.
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2. Eliminate Credit Card Debt
Reduce as many monthly expenses as possible. Begin with high-interest credit cards.
The Federal Reserve's four hikes in 2022 raised rates by a total of 2.25 percentage points, meaning consumers now pay an extra $225 in interest on every $10,000 in debt. Having a revolving balance each month can cost you thousands of dollars.
Eliminating credit card debt frees up income that can be used to build an emergency fund or pay down other debt.
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3. Use Rewards Programs
Cash-back rewards cards can be an excellent way to recoup some of the extra money you're spending due to inflation.
Many businesses provide incentives to customers who spend money with them. You can use these reward points to get discounts on items you usually buy or even cash them in for cash back. You can also use these points to pay off debt, making saving money for emergencies easier.
There are tons of different reward programs out there. Some even offer cash back on consumer staples like groceries or gas.
4. Cut Back On Unnecessary Spending
If you're like most people, you have some things in your life that aren't necessary but add up over time, such as eating out too frequently or buying too many clothes on sale at department stores. Use the following tips to reduce unnecessary spending so you can put more money into savings accounts or pay off debt faster if necessary:
- Eat out less
- Unsubscribe from sales emails that entice you to spend
- Do not purchase items impulsively
5. Consolidate Your Debt
Debt consolidation can be complex because it requires discipline and self-control; however, if done correctly, it will pay off handsomely! Consolidating your debts entails combining all of your debts into a single loan with a lower interest rate, so you only have one payment each month rather than multiple smaller payments.
Once all debt has been consolidated, the money you have should go into savings or be put toward the principal amount on your consolidation loan. Don't think of it as extra money because that will entice you to spend it. Instead, it is the money you would have used to pay off your other debt had you not consolidated. Understanding this simple tactic can keep you on the right track.
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6. Diversify Your Investments
An economic downturn could be a financial disaster if most of your money is invested in the stock market. So instead, diversify your investment portfolio by investing in other types of assets, such as contributing to a 401K or buying a piece of real estate. Having investments in recession-proof industries can help ensure
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It is possible to get ahead of your finances during a recession. Don't panic and stay the course. People tend to pull out all of their investments during a downturn in an effort to turn their assets into quick cash. Having other investment vehicles that will hold your financial value is better than pooling all your money into a savings account due to inflation reducing the dollar value. Having asset classes that are recession resistant could be beneficial in ensuring that your investments do not heavily fluctuate in value during a downturn in the economy.
7. Diversify Your Income
As well as diversifying your investments, you will want to do the same with your income.
If you work a traditional job, it's essential to have another source of income that is not tied to your primary job. When one revenue stream takes a hit, you have another to continue living on, which is the beauty of having multiple income streams.
You can take on getting a second job or use your skills to create a side hustle. Take classes to learn new skills—network amongst like-minded individuals who can help elevate you when needed.
Diversifying your income has many advantages. By doing so, you and your company may build a financial safety net that will enable you to weather bad times, take advantage of new possibilities, and discover new skills and talents.
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8. Take Care of Your Mental Health
With bills to worry about and no idea what your financial future holds, your stress levels can rise. Social media and news outlets can significantly increase your stress levels. Take care of your mental health and cut back on all things that can negatively influence you. Focus on taking care of yourself and getting ahead of your finances.
Practice self-care, go to therapy, spend time with nature, read a good book, binge-watch your favorite show, or enroll in classes to learn new skills to keep your mind in a good state. Too much negativity can leave you feeling defeated and feeling like you don't have the power to change your life when you do.
Recommended Read: How Can Debt Affect Your Mental Health?
The Money Wrap-Up
Getting ahead of the recession consists of creating an emergency fund, eliminating credit card debt, cutting back on unnecessary spending, consolidating debt, diversifying your investments and income, and watching your mental health.
The best way to weather the recession is to ensure your finances are in good shape. Live within your means so that when times get tough financially, it doesn't feel like such a struggle because there isn't as much stress involved in making ends meet each month.
We cannot control a recession, but we can control how we prepare for difficult financial times.
Disclaimer: The information above regarding different investment options should not be considered financial advice. Consult with a professional before making any significant financial decisions.
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