It is important for people to understand the various ways to be financially prepared for a recession, especially in recent times.
For some counties like the United States and a few others, their economy may have just completed the fastest recovery from a recession in history — a significant achievement following a crisis as devastating as the coronavirus epidemic — but forecasters, investors, and consumers alike are concerned that another slump is on the way.
Recessions affect more than just economic models, and consumers frequently face financial difficulties as a result of job losses or wage reduction. One of life’s most distressing realities is that downturns are unavoidable, owing to the economy’s cyclical nature.
All of this is to imply that, downturn or no downturn, preparing your finances for tough economic times is an important aspect of your financial strength.
5 Things You Should Do Before a Recession
Here are five things important for consumers to do before a recession:
- Create a Financial Plan – Knowing your income and expenses, as well as having a clear plan for your money, can help you feel less stressed about money. Budgeting can assist you in modifying your spending habits and prioritizing your objectives. Make a plan to assist you avoid taking on too much debt or paying off what you already owe. However, you don’t have to limit yourself to paying off debt or increasing your savings; you can also invest for the future.
- Advance Your Career – Recessions are traditionally associated with increased unemployment, so preparing your career for the next downturn is critical. Now is an excellent time to reach out to your network and keep in touch with those in your field. Higher education is associated with reduced unemployment rates, so if you’ve considered returning to school, now might be the time. Adding new talents or enhancing existing ones could give you an advantage in a future, more competitive employment market.
- Have an Emergency Fund for Backup – Whether or not there is a recession, you should have an emergency fund. These funds allow you to avoid taking out loans to meet unexpected expenses such as repairs, medical treatments, or job loss. Emergencies are exactly that: unanticipated. And a good number of people aren’t ready for them.
If you’re just starting out, I recommend keeping six months’ worth of costs on hand, including rent, electricity, and groceries. That amount may appear large initially, but small donations over time can add to significant savings. You’ll want to keep your emergency funds in a liquid account (such as a high-yield savings account), so you can get to them quickly if you need them.
Other things to do before the recession include:
- Always stay up-to-date with the news.
- Ensure you make decisive moves and decisions before the downturn hits.
7 Ways to be Financially Prepared for a Recession
Here are seven steps to ensure your funds are recession-proof and that you are financially prepared for a recession:
Evaluate your Financial Priorities
One of the most difficult aspects of a recession — let alone a global epidemic — is not knowing what will happen next or when things will improve. That’s why it’s critical to understand your financial situation as this will help you be financially prepared for a recession. As you assess your financial status, ask yourself these crucial questions.
What is the total amount of money I have on hand?
How much cash can I get my hands on immediately in the event that I require it?
What kind of debt do I have now (credit cards, student loans, etc.)?
What are my monthly essential living expenditures, such as food, shelter, health insurance, transportation, and childcare?
Do you have any major life events coming up, like weddings, the birth of a child, or retirement, that may require a large financial outlay?
Now is the moment to figure out how much you’re spending right now and what you’ll need in the following six months. If you’re well-prepared for a recession, job loss, or other financial setbacks, your emergency fund will have three to six months’ worth of living expenses.
Set a financial goal if you don’t have at least three to six months’ worth of basic expenses in cash. Begin by gaining a basic awareness of your spending habits and creating a budget.
It’s fine if your budget needs to change in order to prepare for a recession. Reduce non-essential spendings such as entertainment, cable, and apparel. While it’s impractical to expect to eliminate all discretionary expenditure, it’s critical to distinguish between wants and requirements. Examine your finances for areas where you may have overspent. Try to figure out what went wrong. You may not have any extra cash to put toward your retirement or a down payment right now, which is fine in the short term.
You’ll be off to a fantastic start once you examine your expenditures and look for areas with problems.
Make debt repayment a top priority
You may be concerned about repaying outstanding debts, such as credit card payments, utilities, or student loans, in the future months. If you lose your job, you may be forced to postpone paying one or more of these expenses, so it’s critical to know which ones you must pay.
After all, if you lose your job, you may be unable to pay all of your bills on time or in full each month. And your credit ratings will suffer as a result of this. While we typically advise doing everything possible to maintain your credit scores, this may not always be practical. As a result, you should prioritize how you pay your payments so that you can cover as many debts as possible with your available funds.
- Make sure your rent or mortgage is paid in whole and on time. You don’t want to be evicted or risk foreclosure.
- Make your automobile payment, particularly if you rely on it to get to work.
- If your income is being reduced, contact your student debt lender and request a hardship application, which may allow you to avoid making payments for a few months all the while helping you be financially prepared for a recession.
- Use your credit card to make at least the minimum payment. Call your credit card provider to arrange a payment plan if that isn’t an option. (Just be aware that the creditor will most likely put a hold on your accounts, preventing you from making any more purchases with the card.)
- If you can, continue to pay your medical bills, but only after you’ve paid off your other debts. If your company provides your health insurance, you will continue to have coverage even if your medical expenses rise. If you acquire your own health insurance for whatever reason, whether you’re self-employed or not, be sure you pay your premium on time to avoid having your coverage canceled as this will also help you be financially prepared for a recession.
If you’re behind on your payments, don’t wait to contact your creditors and request hardship concessions. Making interest-only payments on your debt or putting payments into forbearance are examples of this.
You can also apply for a personal loan via your local bank or credit union. There are also online lenders, and your employer may have a short-term loan program available in times of need.
You can also approach your credit card company or any other lender to lower your interest rates if you make on-time payments. A large number of major utility companies provide programs that may allow you to pay your bills later or provide other forms of assistance if you are experiencing financial difficulties.
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Employ and use government and community assistance programs
Fortunately, to be financially prepared for a recession, many local, state, and federal governments will step in to help those in need during a recession. During the Coronavirus (Covid-19) pandemic, for example, the US government is contemplating a variety of aid options.
It has already declared that taxpayers will be given an automatic extension to pay their tax bills and file their taxes without penalty or interest.
The deadline for filing taxes has been pushed out from April 15th to July 15th. A temporary moratorium on foreclosures and evictions for homeowners with federally backed mortgages has also been established under the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
If you have a federally backed mortgage, you may be eligible for mortgage forbearance if you have faced financial hardship as a result of the COVID-19 outbreak.
More information about coronavirus mortgage relief possibilities can be found in the Consumer Financial Protection Bureau’s guide on coronavirus mortgage relief choices.
On a lesser scale, community organizations such as food banks and places of worship will frequently offer assistance to those in need. Check with your local government and community activist groups to see if there are any resources in your region that can help you with your specific needs.
Make the most of your emergency fund by putting as much money as possible into it
Even if job cuts or layoffs are on the horizon, maintain putting money into your emergency fund as much as necessary. When the money stops coming, you’ll need every penny. Give up all extras, including delivery and takeout. Try to live as simply as possible so that your money may stretch as far as you need it to.
While using your emergency fund should never be taken lightly as this is vital to being financially prepared for a recession, losing your job or being forced to live on a lower wage certainly qualifies as a solid cause to use some of the money you’ve saved.
However, as soon as your financial condition improves, you should begin rebuilding your emergency fund. If not, you may be forced to make difficult decisions, like as withdrawing funds from your retirement account or asking for a home equity line of credit, when the next emergency strikes.
Increase your Income Sources
Don’t forget to invest in yourself as the unemployment rate rises by continuing to develop your skills and training. Take more classes to improve your resume. This provides you an advantage over your competitors and helps you be financially prepared for a recession.
Getting a better-paying work can help you save more money and prepare for retirement, so keep looking for new chances.
Other ways to be financially prepared for a recession in 2022 include:
- Concentrate on the long term and diversify your portfolio
- Don’t make rash decisions when it comes to your investments
What Thrives During A Recession?
Recessions are challenging times. Many people are struggling financially, and many more are concerned that they may be next. A recession, on the other hand, may present a chance for a select set of professionals to thrive and grow. Here are a few examples:
Economists and financial advisors
People with a lot of money want to ensure they’re taken care of, especially during a downturn. As people become concerned about the security of their investments and seek advice on how to protect their holdings, financial advisors typically see an increase in activity.
Dining out becomes a luxury for many people during a recession. People prefer to prepare more meals at home and even entertain their friends at home, thus supermarkets often witness a spike in sales.
Discount and Bargain Stores
During a recession, people cut back on pleasures, but it doesn’t imply they never buy anything that isn’t absolutely required. Even a witty economic theory called the Lipstick Index claims that because cosmetics are a relatively inexpensive indulgence, sales will always grow during tough times.
However, bargain and discount retailers sell a wide range of additional inexpensive products. When a recession strikes, people who would never purchase at a dollar store otherwise reconsider their purchasing habits.
- Property Management Companies and Rental Agents
- Auto Repair and Maintenance
Although the events of the next few years may be unknown, the greatest thing you can do now to prepare is to take proactive steps which will help you be financially prepared for a recession. Coin Decimal can provide you with trustworthy information on important financial matters to help you remain on top of your finances during these trying times. Financial knowledge is more vital than ever before, so you may feel good about your financial situation regardless of the challenges ahead.