4 Moves You Can Make Today to Prepare for a Recession

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  • If you don't have a budget, now's a good time to look at your monthly income and expenses.
  • An emergency fund will cushion you against unexpected events such as job loss.
  • Paying down debt now means you won’t be saddled with higher interest payments if the economy nosedives.

Here's how to get your finances in shape before an economic downturn.

As the cost of living spirals, many economists believe the U.S. is heading for a recession. It isn't a certainty, but it could happen. Recessions can cause job losses, falling sales for businesses, and a general economic slowdown. While they are a part of the normal economic cycle, that doesn't stop them from being scary.

The possibility we may soon face a recession is a good opportunity to get your finances in order. Here are some ways to prepare for a recession, just in case one is about to hit.

1. Review your budget -- or create one

Lots of people don't track their monthly spending, so if you don't have a budget, you are not alone. It's easy to push budgeting to the bottom of your to-do list, especially when it feels like there are never enough hours in the day. It may be that you don't want to face your monthly spending, which is also understandable. However, now might be the time to carve out even half an hour to sit down and look at your budget, particularly if you're worried about a potential recession.

Budgeting doesn't have to be complicated, and there are lots of great budgeting apps out there that can help. Rather than seeing it as something that is going to restrict your lifestyle and stop you from spending money, try to see it as a way to enable you to continue to do fun things -- even when times get difficult. If you can change the way you think about budgeting, it may be easier to actually do it.

Whether you use an app or the old-fashioned pen and paper, setting up a budget will help you get a handle on what you're doing with your money. The best way to prepare for a recession is to understand your financial situation and have an idea of how you'll cope if things get difficult. Try to look at where your paycheck disappears to, how much you spend on rent and bills, and how much goes toward other things. If you can identify areas where you can cut back a little and set some savings goals, it will be a big step toward increasing your financial stability.

2. Focus on your emergency savings

The general rule of thumb is to have three to six months' worth of living expenses put aside in case of emergencies. That way, if you lose your job or face an unexpected medical bill, you can dip into your emergency fund to cover the costs. The exact amount you save depends on your living costs and personal situation. If you're worried about a recession, you may want to put even more cash aside now to give yourself some extra protection.

If you're living paycheck to paycheck, it may seem impossible to put that much aside. But try to save something. Even a small amount of money each month will give you a bit of a cushion against the unexpected. If a recession does hit, your savings will be like a life raft. The more you can build it up, the more protection you'll have.

3. Pay down high interest debt

High interest debt can eat into your cash faster than a child with a tub of ice cream. The more you can pay down now, the less you'll have to deal with if the economy takes a turn for the worse. Work out how much you owe, and how much interest you are paying to each of your creditors. There are a few different strategies you can use to pay down debt. These include paying off the smallest balances first or prioritizing the highest interest payments.

If you have good credit, you might also be able to consolidate your debt to reduce your monthly payments, or even transfer credit card debt to one with a 0% introductory APR. As with many things, the first step is to understand your situation so you can make a plan for how to deal with it.

4. Consider extra sources of income

In preparing for a recession, saving is the name of the game. And there are two real ways to save more money: Reduce your costs or increase your income. If you've already pared your monthly spending down as far as possible and you're still struggling to tackle debt or put money into your savings account, it may be a good time to look for a side hustle.

Right now, unemployment rates are low and there are a lot of opportunities. That means you may be able to pick up some extra hours with your current employer, or find some additional work on the side. If the economy runs into difficulties, the situation may change and companies may start laying off staff. A job on the side might help tide you over in the event you lose your regular job, as well as giving you some extra cash right now.

One word of warning though: If you do take on extra work, make sure it doesn't come at the cost of your regular responsibilities. Don't give in to the temptation to use time at your main job for your side hustle, or in any way damage your relationship with your current employer. You don't want to lose your nine-to-five job because you took on a side hustle.

Bottom line

It's important not to panic at the prospect of a recession. Instead, try to use it as an opportunity to shore up your financial situation and boost your savings. It's certainly a good reason not to spend too much on non-essentials and to avoid taking on unnecessary debt.

Right now, preparing for a recession is like preparing for bad weather -- we don't know when it will hit or how bad it will be, but it's time to batten down the hatches just in case.

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