Just like it’s only a matter of time before Batman has yet another reboot, a recession is bound to happen in the next few years. And while you may be counting the days until your favorite Hollywood heartthrob takes on the crime lords of Gotham City, you’re probably not as eager for a recession.
Recessions are scary. They’re a time of economic downturn, and nobody truly knows how long a recession will last. One of the worst parts of a recession is not knowing what’s going to happen with your job. Will you get laid off? Take a pay cut? Have your hours reduced? You won’t know for sure until something happens…and that can be stressful.
While you can’t completely eliminate the stress of the unknown, you can reduce it by preparing your finances for a recession. Putting a little bit of energy into your money now could drastically reduce your stress later.
Here are four ways to get your finances ready for a recession.
Boost your emergency fund savings
Don’t wait until there are company whispers that layoffs are coming to start saving. At that point, you won’t have enough time to build a real safety net. Double down on your saving efforts now.
An emergency fund is a readily available money, and you should aim for six months of living expenses in your emergency fund. If your emergency fund is already fully funded, consider saving a few extra months of living expenses just in case.
Recessions can last between eight and 18 months, with the average recession lasting about eleven months. Boosting your emergency fund a few months could be the difference between making it through a recession financially unscathed or scrounging for change every time you need groceries.
Bonus tip: Not the saving type? Otherhood helps you create a customized savings plan based on your personal expenses. Plus, you can have your savings withdrawn from your paycheck as a pre-tax deduction and sign up for an employer match. You’ll save exactly what you need, faster.
Pay off debt
When you pay off debt, your money goes towards past expenses, rather than the current ones. With a steady paycheck, this might not seem like a big deal, but if you’re unemployed, it’ll seriously cramp your financial style.
Paying down debt, especially high-interest debt, is one of the most important things can you do before a recession. If you lose your job, and can only afford to make minimum payments, the interest rates will keep your money tied up in minimum payments. These payments could drain your emergency savings fast.
Start paying down high-interest debt first, like credit card debt. If you have multiple credit cards, choose the card with the highest interest rate and make extra payments on that card. After the card is paid off, roll the additional payments into the card with the next highest interest rate.
If you plan on getting super aggressive paying down your credit card debt, considering opening a card with a 0% introductory APR and transferring the balance to this card. This way, your entire payment is going towards the debt, not the interest.
Another option is to take out a debt consolidation loan, which sometimes has a lower interest rate than a credit card. If you have good credit, you could reduce your interest rate from 14–17% (which is typical for most credit cards) to below 10%- significantly reducing your interest payments.
Cut back expenses
With all the extra savings and paying down debt, you might be wondering where all this money is going to come from. That’s where cutting back your expenses comes in.
If you’re like most people, not everything you spend money on is necessary for your survival. You probably have expenses that you wouldn’t miss and some that you’d miss, but could live without. These expenses are called wants or non-essential expenses.
The best time to cut back non-essential expenses is before a recession. Imagine getting laid off and, on top of the stress of losing your job, you drastically change your lifestyle. Talk about a major downer.
If you start cutting back expenses now, if a recession does impact you, it won’t feel like a wrecking ball tearing through your finances. Instead, you’ll get used to the lifestyle change over time and can put the extra money towards your emergency savings and credit card payments.
Once a month, identify one non-essential expense that you can cut out of your budget. Start with changes that won’t affect your lifestyle, like canceling a subscription that you’re not using. Work your way up to reducing expenses that you’re attached to, but don’t have a significant impact on your life.
Hold off on big purchases
Now is not the time to indulge in your fantasy of splurging on a four-day Walking Dead cruise or buying a Batmobile replica for long drives down the coast. When preparing for a recession, put a moratorium on big, unnecessary expenses and focus your financial power on saving.
But what if you’ve been saving for something special for a while? Before you buy go through this 5-point checklist and see if your finances are really ready for a big purchase:
- Do you have six months of living expenses saved in an emergency fund?
- Have you paid off all of your credit card debt?
- Have you paid off your car, student loans, or home? If not, would this money be better spent going towards these long-term debts?
- Is your retirement savings on track for your target retirement date?
- Are there other significant life events that you need to save for, like paternity leave or your child’s college fund?
If you’ve got all your financial bases covered then sure, go ahead and indulge in that Louis Vuitton Skateboard… or just keep saving.
The truth is, we don’t know for sure if or when a recession will hit. But what we do is that with a little bit of planning, you can prepare your finances to withstand any storm. And you’ll even have some money left to see your favorite caped crusader on opening night.