This Is the Most Important Thing You Can Do to Prepare for a Recession
- There's reason to believe economic conditions could decline in 2023.
- One move in particular could set you up to weather that type of storm.
- Add to your emergency fund, with a minimum savings goal of three months' worth of expenses -- but having even more would be better.
It could spare you a world of financial pain later.
If a recession hits in 2023, it could end up being fairly short-lived. Or it could, as one economist predicts, be "long and ugly."
Unfortunately, there's no way to know which end of that spectrum is more accurate. In fact, technically, we can't say with certainty that a recession will hit in 2023 at all. But there is reason to believe one might.
The Federal Reserve has been moving forward with aggressive interest rate hikes in order to slow the pace of inflation and provide relief to cash-strapped consumers. By making borrowing more expensive, the Fed is effectively encouraging consumers to start cutting back on spending. And if spending levels decline, it could be enough to bridge the gap between supply and demand that's been causing inflation to surge.
But the fear is that consumer spending could decline to a drastic degree. And that could be enough to fuel a recession, which is why so many economists are sounding warnings about things to come.
If you're worried about a recession hitting next year, you're in good company. But there's one step you can take to gear up.
Give your savings a boost
Perhaps the most important step you can take to prepare for a recession is to boost your emergency fund. The more cash reserves you have, the more options you'll have in the event that you lose your job and the paycheck that comes with it.
How much money should you aim to have in your savings account? Part of that depends on your personal situation. But at a minimum, you should make sure to have enough cash to cover a full three months of essential bills. If you lose your job, it might take you at least that long to find a new one.
A better bet, however, may be to save enough to cover more like six months' worth of essential bills -- or more, if you're the sole breadwinner in your household and you work in an industry where jobs can be hard to come by. In fact, some financial experts have, in the wake of the COVID-19 pandemic, changed their guidance on emergency savings -- and they now say that having up to a year's worth of expenses in the bank is a smart move.
What else can you do?
Shoring up your emergency fund is essential if you want to prepare for a recession. But that's not the only thing you can do.
You may also want to line up a side gig so that if your main job is yanked away, you have a backup source of income to turn to. And if you're carrying high-interest debt, now's a good time to pay it off. You won't want debt payments hanging over your head if you're laid off and need all of your savings and unemployment benefits to cover your essential bills.
The idea of a recession is scary -- there's no question about it. But if you build yourself a solid emergency fund, that alone might ease your mind.
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