13 Ways to Make Your Finances Recession Resistant

Recession isn't official yet, but many financial pundits believe we're heading in that direction. Recession affects both sides of your personal income statement, and not in a good way. Rising unemployment and flat wages can affect the stability of your income. And higher prices stretch your budget.

Those two outcomes combined can create financial disaster, especially if you're currently living paycheck to paycheck.

The good news is that there are ways to make your finances recession resistant. Use this time now -- while the U.S. employment picture is still stable -- to shore up your finances. Read on for 13 finance-strengthening steps you can take.

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An emergency fund is a store of cash. You dip into it when you have unexpected expenses or an income loss. Ideally, your cash fund balance should be enough to cover your living expenses for three to six months.

Having a cash fund is one of the best protections against recession. The challenge is that it's tough to save that much dough. The most reliable approach here is to take it slow. Make one deposit to a cash savings account each time you get paid. Shoot for 5% of your pay if you can swing it. And then, importantly, forget about that cash until you really need it.

ALSO READ: What Does "Cash Is King" Mean?

Side hustles are rewarding and good for your finances, too. Use the income to boost your finances in your weakest area. You might pad your emergency fund, pay down high-rate debt, or invest in stocks.

Later, if you lose your job or get furloughed, you could ramp up your side hustle temporarily. The goal would be to bridge the gap between jobs without relying on credit cards or a hardship withdrawal from your retirement account.

When you track your expenses by category, you learn where you spend money. And that can be enlightening. For example, you may not realize you're spending hundreds monthly on dining out. But you'll see that pattern emerge when you start categorizing your banking transactions.

Knowing your own spending habits allows you to adjust more quickly if your financial situation changes.

If expense tracking seems terribly cumbersome, try automated features within budgeting apps like Mint, Goodbudget, and EveryDollar. Or, explore the features of your bank's app -- it may also support automatic expense categorization.

ALSO READ: The Best Banking Apps for 2022

High-rate balances that roll over monthly are expensive. The interest charges may be manageable while you're working, but they'll be tough to absorb if you get laid off.

There's another issue with carrying balances. The higher your balances are, the less debt you have available going forward. That could be problematic in a financial emergency. While credit cards aren't the best way to fund unexpected expenses, they can get the job done in a pinch.

Lower your ongoing interest costs and preserve your available debt for emergencies by paying down those credit card accounts.

If you are living paycheck to paycheck, find a way to break that cycle. There are two approaches you can take. One, you can raise your income -- say, with a side hustle. Or two, you can lower your living expenses by downsizing.

The gap you create between your income and expenses will help you pay down debt, raise your emergency fund balance, or save for the long term.

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Stocks, stock mutual funds, and stock exchange-traded funds (ETFs) appreciate over time. Even better, stocks grow faster than inflation over the long term. That appreciation increases your net worth over time, which also improves your financial flexibility.

The trick is to invest money you won't need for at least five years. This is a strategy to manage stock market volatility. When the market dips, you don't want to lock in those losses by selling. The five-year window gives you the flexibility to wait for the downturn to resolve itself.

ALSO READ: 3 Things the Smartest Investors Do During a Recession

Passive income, like side hustle income, can help you strengthen the weaker areas of your finances. Unlike side hustle income, income that's truly passive requires little time and effort.

A sizable passive income stream can also take longer to build than a profitable side hustle. Dividend stocks are an example. With a dividend portfolio that yields 2%, you'd need $50,000 worth of dividend payers to earn $1,000 a year. You probably don't have $50,000 of available cash just sitting around.

The takeaway is to start working on your passive income portfolio sooner rather than later. You might start small by investing $50 or $100 a month. Over time, look for ways to increase that investment.

Alternative assets are investments other than stocks, bonds, and cash. One appealing characteristic of some alternatives is that they don't move in lockstep with the stock market. Real estate is an example. The value of your home can keep rising even as the stock market is falling.

Popular alternative assets include real estate, collectibles, gold and other precious metals, and cryptocurrencies. Real estate is at the top of the list because it's accessible and more predictable than other options.

You can invest in real estate directly or by buying shares of real estate mutual funds or ETFs or real estate investment trusts (REITs).

ALSO READ: 10 Alternative Assets to Protect Against Inflation

Rising unemployment is one of the most damaging consequences of recession. That's why most of the strategies on this list are defenses to manage through an income loss.

You can also address job loss risk directly -- by making yourself indispensable at work. Volunteer for more responsibility without pay if that's what it takes. Better to do more now and sidestep the layoff list. You can always ask for a raise later when the economy stabilizes.

A spending freeze can save you money. It can also function as a practice test for surviving on lower income.

Imagine if you do lose your job and you haven't yet topped off your emergency fund. You'll have to get by on unemployment income temporarily. Unemployment benefits replace about 40% of your working income on average. To make that work with minimal extra debt, you'd have to pause all discretionary spending. That's basically an indefinite spending freeze.

Try avoiding all discretionary expenses for a weekend. See what you learn about yourself and your spending in the process.

ALSO READ: 20 Ways to Cut Spending

A high credit score gives you access to low-rate debt. A low-rate debt lowers the total cost of any asset you finance, including homes and cars. Managing your bills responsibly also minimizes bank charges and could even lower your car insurance premium.

Learn about the factors that influence your credit score and work them to your advantage. Lean on free tools like Experian Boost and Credit Karma to help.

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Being underinsured exposes you to big expenses and, sometimes, legal trouble. Being overinsured is expensive. The sweet spot is where you have enough coverage but you're not overpaying.

Your net worth should guide your liability limits, while your emergency fund balance should dictate your deductibles. Ideally, you'd keep enough liability coverage to protect your assets and maintain deductibles you can easily afford to pay in cash.

ALSO READ: What Is Liability Car Insurance and What Does It Cover?

In matters of personal finance, it can be helpful to plan for the worst-case scenario. That scenario might be losing your job tomorrow -- before you've had time to fatten your emergency fund or pay down debt.

Think through how you would make ends meet, with the objective of limiting long-term financial consequences. The answer might be moving in with family temporarily, selling some assets, or picking up gig work. Whatever it is, you'll feel less stress if you get comfortable with the backup plan now, rather than later.

Whether or not recession is imminent, stronger finances are better than weaker finances. The efforts you put into building an emergency fund, paying down debt, investing, and keeping your spending in check reap lifelong rewards. These actions build your net worth and give you confidence that you can set and achieve bold financial goals.

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