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15 Ways to Prepare Your Finances for a Recession

By Rachel Warren - Sep 4, 2022 at 8:00AM
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15 Ways to Prepare Your Finances for a Recession

Planning for a potential economic downturn

While we've seen many positive signs of economic growth and recovery in the wake of the pandemic, concerns linger that a recession could still be around the corner. While leading economists are divided as to whether or not we are in for a recession, this does nothing to alleviate the concern many consumers are facing right now.

If you're wondering what a recession could mean for the state of your finances in the near future, here are 15 simple ways to get ready starting right now.

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1. Review your budget inside and out (and if you don't have one, make one now)

In any environment, recessionary or not, understanding where your money is going and how you're managing the money you have to work with is crucial to building a robust financial plan. You don't need to be rich to manage your money well, and having a lot of money doesn't mean you'll manage it well, either.

Living within your means, consistently saving money, and investing regularly are all essential to improve the health of your finances over the long term and provide peace of mind and a clear path forward in a recession.

If you don't yet have a budget, or you feel that your current one could use a few upgrades, look at your current spending levels as they compare with your regular income. If there are any areas you can cut back on, or if you are seeing an imbalance between your spending and saving, it may be time to make some changes.

ALSO READ: How Does the Stock Market Perform During a Recession? Here's What History Shows

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2. Check in on your financial goals

As consumers have seen factors like inflation impact spending power and cause businesses everywhere to raise prices, this has also had a myriad impact on the personal financial situations of many. Whatever your financial goals, it's important to understand how a recession could impact your ability to meet the objectives you've set for the next few years.

If you're concerned that you may be unable to meet your financial targets in the event of a recession, now is the time to implement changes to your savings strategy and outlay that could give you more capital to work with if one strikes.

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Blackboard reading Get Out of Debt.

3. Don't wait to pay down debt

During a recession, few things cause as much headache and personal financial worry as the strain of outstanding debt. Not all forms of debt are inherently bad, but high-interest debt is something that you never want to hold for a prolonged period. Whether it's outstanding credit card balances, a high-interest loan, or otherwise, use this time to set your debt repayment plan in motion.

If you're not in a position to pay down all of your high-interest debt at once, set a payment schedule for yourself that you can stick to and an end date by which you want to be free of that particular debt or debts. Not only will ridding yourself of high-interest debt have a positive impact on your finances as a whole, but you could also enjoy benefits like a better credit score and lower interest rates on other types of loans like mortgages in the future.

ALSO READ: How to 10X Your Retirement Savings While Barely Lifting a Finger

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4. Don't leave your future to chance, build up your emergency reserve fund now

It's natural for consumers to feel unease at the thought of a recession. While there are always certain variables that can strain one's personal finances during such a period, there is one key strategy that can provide a certain level of reassurance in a recession, and that's a robust emergency fund.

This is the money you save for things like medical emergencies, a job loss, or another unexpected life event. If a recession brings such an event into your life, a well-stocked emergency fund can help you stay afloat while you figure things out. An emergency fund should have a minimum of half a year's worth of expenses saved up in it.

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5. Review your savings strategy

You know what else can bring you peace of mind during recession? Knowing that you have a solid nest egg saved up to help secure your financial future. To be clear, your savings should be completely separate from your emergency fund. Your savings could include a variety of assets, including cash savings, retirement accounts, and investment portfolios.

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6. Evaluate the balance of your investment portfolio

While a recession can impact the stock market temporarily, this can also provide a variety of opportunities to invest in resilient, quality companies at a bargain. Are you concerned about how your investment portfolio may hold up in the event of a recession? Now is a great time to look at the balance of your holdings and see if they represent your ideal risk tolerance level and asset allocation.

Evaluate the companies you own and ensure that your thesis holds true for each. If your reason or reasons for buying a stock has changed and/or you no longer have faith in the direction the company is headed, it may be wise to trim here and there and allocate that capital elsewhere.

ALSO READ: 3 Ways to Grow $100,000 Into $1 Million for Retirement Savings

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A person sits with a laptop on a couch.

7. Consider taking on a side hustle to increase your monthly income

The gig economy continues to boom, and this has created no shortage of opportunities for workers across all industries to increase their income in the way that works best for them. If you've ever considered taking on a side hustle, now may be a great time to establish yourself in whatever type of role you wish to pursue and work on maximizing your income in addition to your regular salary.

Whether you want to start your own virtual store, do some freelance work online, or simply dedicate a few extra hours a week to earning some extra cash, there are options available for individuals of all skill sets and interests.

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Person shopping for clothes on mobile phone.

8. Consider reselling items to earn extra cash

The bustling gig economy provides a variety of exciting options for the workers of today, but it's understandable if your current situation and job simply don't allow you to take on any extra work. If you're looking to make some extra money without dedicating too much time, you may consider reselling some items you already own for cash.

Whether you want to resell clothes you own in good condition, or items you've picked up at local estate or garage sales, you could earn a few hundred dollars a month or more simply reselling items you already own, provided you have the time to list them online and send them out.

ALSO READ: Worried About a Recession? Buy These 3 Stocks and Hold Forever

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Jar full of cash and labeled Retirement.

9. Fortify your retirement plan

Even if you're decades away from retirement, it's never too early to start planning for it. Regardless of whether or not recession is looming, determining your retirement savings goal and measuring that up against your timeline to retirement can help you determine the most advantageous investments to achieve those targets. This may also entail switching retirement plans, boosting your savings goals, or expanding to more conservative investment classes. One thing is certain: Don't leave your retirement plan to chance.

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Many arrows pointing in one direction and just one pointing in the other.

10. Emotions are heightened, but don't let them drive your financial decisions

Fear and panic are often rampant in the market during a recession. This is understandable. However, these emotions can lead investors of all ages to make highly questionable decisions based on short-term circumstances that impact the state of their portfolios for years to come. Any decisions you make about your portfolio now or in the future should be founded on a solid strategy and long-term plan.

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11. Allocate your investment capital across numerous types of assets

One basic, but nonetheless effective, method to reduce the impact of a recession on your investment portfolio is to ensure that you're properly diversified. Your ideal diversification strategy will depend on a few different factors, including the types of companies and investments you favor, your personal risk tolerance, and how close you are to retirement.

Buying quality companies across a wide range of industries and various types of asset classes can lend significant balance to your portfolio in the event one or more of those industries are under particular pressure during a downturn.

ALSO READ: Why Ignoring Your Investments Could Be Good for Your Finances Right Now

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Person smiles while typing on laptop as another person stands by to help.

12. Add consistently to your stock portfolio

As an investor, you might be wondering how to approach building a portfolio in a recessionary environment. Your approach doesn't have to be complicated. Making a habit of regularly investing cash into great companies beats trying to time or predict the market, without fail.

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Pots of cash plants springing upward.

13. Slash your outlay anywhere you can

Now is the time to cut expenses where you can, beef up your rainy day fund, and take a hard look at where your finances need to be if you want to achieve the goals you have set in the context of a recessionary environment. If there are areas where you can cut back on costs, however small they may seem, this is the time to be doing it. Those little costs can add up to be a significant drain on your income over time, and small but consistent changes matter in the long run.

ALSO READ: Less Than Half of Workers Think They'll Meet Their Retirement Savings Goals. Do These Things if You Have to Catch Up

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Three people at a table looking at papers and planning.

14. Assess any weaknesses in your financial plan

Whether it's questionable investments dragging your portfolio down, an inadequate emergency fund, or other weaknesses in your personal financial plan, don't wait to identify and address these deficiencies until a recession hits. In fact, whether or not a recession takes hold, it's always a good idea to check in on your financial plan from time to time.

Are you consistently meeting the financial goals you set for yourself? Do you have six to 12 months' worth of expenses saved up in case of an emergency? Are you regularly adding cash to your savings? Are you consistently investing your money? Do you have outstanding debt, and if so, are you implementing a repayment plan to discharge these obligations? How vulnerable is your income if a recession hits? How are you managing your money within the context of your income, and do you need to take on additional work to fund the financial goals you set for yourself?

These are some important questions to start considering as you take a look at your current financial plan, regardless of a pending recession.

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Adult uses calculator in front of laptop next to a larger monitor with charts.

15. Focus on investments with the potential for long-term stability and growth

A recession can put downward pressure on stock prices across industries and create a tough environment for companies in general over the short term. That being said, established companies with strong leadership, a quality underlying business or businesses, favorable industry tailwinds, and strategic market leadership can and will outlive a recession.

These are the types of companies to train your focus on in any market environment -- and you may just be able to invest in them at a discount during a recession. Bear in mind, when you're investing in companies for anywhere from three to five years or longer, a recession can be a mere blip on the radar in comparison to the life span of your investment.

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Looking ahead to the rest of 2022

Hard as it may be to believe, we only have a few months left before we reach the end of 2022. Whether you're an established investor or completely new to investing, this is a period of uncertainty for many. As individual retail investors, there are many variables that are wholly beyond our control. None of us can change the actions of the market or dictate the whims of the economy.

What we can do is fortify our financial plans. From enacting an aggressive savings plan to getting rid of debt to sticking to a consistent, strategic approach to investing, it's these simple but persistent steps that will help you prepare your finances for whatever lies ahead and build a stronger financial future.

The Motley Fool has a disclosure policy.

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