Can You Recession-Proof Your Finances?

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  • A recession is likely coming soon, and it could do a lot of damages to your finances.
  • It's possible to take steps to recession-proof your finances.
  • Now is a good time to ensure you have an emergency fund, can stay out of further debt, and keep your fixed expenses low.

How can you make sure a recession doesn't affect your bottom line?

Many economic experts are warning that a recession is coming. A recession is a prolonged period of economic downturn that usually involves negative growth and high rates of unemployment.

Recessions are bad news for the economy as a whole, and many people will find their personal finances are impacted by one as well. The good news is, there are some steps you can take to recession-proof your financial life so a downturn in the economy doesn't cause long-term consequences for you personally.

Here are some of the steps you should take in light of the recession that is likely on its way.

1. Save up an emergency fund

Saving up a large emergency fund is one of the single most important steps you should take if you want to make sure a recession doesn't damage your financial prospects.

Depending on your job, there's a very real risk of unemployment during periods of economic downturns as businesses tighten their belt. If your income is cut or you lose your job entirely, the last thing you need is to be unable to pay your bills and end up risking foreclosure of your home or repossession of your vehicle.

If you have a generous emergency fund that can cover three to six months of living expenses, you can ensure you don't suffer long-term consequences due to a temporary job loss. You can just take money out of your savings account to cover the essentials.

2. Keep your fixed expenses as low as possible

If the economy goes south and you do lose your job or don't have as much money coming in, it's helpful to have lower fixed expenses so you can survive for longer on your emergency fund.

If your required monthly bills, such as your mortgage or rent, utilities, grocery costs, and car payments are very high, then it is going to be much more stressful and difficult for you to make it through tough economic times.

But, if your fixed costs are pretty low, you should be easily able to afford them -- and you can always make temporary cuts to your discretionary spending if you need to.

3. Limit the debt you take on

Debt can be a big problem during a recession. Any money you're sending to creditors is money you can't use for other things. Plus, if you do lose your job, you still need to continue making your debt payments unless you want to damage your credit and potentially risk legal action.

By limiting the debt you take on, you can avoid making ongoing commitments you have to keep during a recession. And you'll be able to preserve your emergency fund or use more of your income for other things rather than sending a ton of money to your creditors during tough economic times.

4. Be smart about your investments

A recession can send shock waves through the stock market and you could see the value of your investments fall. It's important not to panic if this happens.

If you build a diversified portfolio of solid investments, you should get back any money you lost during the inevitable recovery that always follows a market crash. But if you sell at a bad time, you could lock in losses. You'll want to avoid this and stay the course.

It's best to make sure you do have a diversified portfolio made up of solid long-term investments before a recession happens so you can have the confidence of knowing your investments will come out all right in the end.

By taking these four steps, you can do as much as possible to recession-proof your finances. When economic trouble comes, you'll be glad you made the effort.

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