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Recession-Proof Your Finances with These 3 Steps

Is there a recession coming? And what does that mean? An economic downturn can mean months or years of declining economic activity across the nation.

But a recession can also affect the lives of individuals. By being proactive and taking steps now to protect your finances, you can lessen any effects that a recession may have on you and your family.



How Do Recessions Affect You?

Recessions are part of a normal business cycle. These short-term declines in the economy can last anywhere from six months to over a year. Typical characteristics of a recession are:

● Rise in unemployment rates

● Uptick in business failures and company closures

● Lower retail sales

● Reduction in manufacturing

● Drop in real estate prices

● Bear Market

● Weak or negative economic growth

● Decline in wages and salaries


While these characteristics undoubtedly impact the economy, their effects can also be felt in our everyday lives. Adjustments will usually need to be made to protect yourself financially. Ways that a recession may affect you include:

● Loss of job or reduction of hours

● Decrease in pay

● Elimination of an expected bonus

● Reduction in the value of your home

● Increase in the price of food, gas, transportation, housing, and basic necessities

● Difficulty in finding employment for recent college graduates

● Noticeable drop in investment accounts

● Increase in stress, anxiety, and depression

A recession influences our collective and private lives, sometimes causing upheavals and hardships. Lower birth rates, higher family conflicts, and higher divorce rates are also a trend during hard economic times. It can take years to financially recover from the negative effects of a recession.


Three Steps to Becoming Recession-Proof

Planning ahead can help prepare you for the next economic downturn, whether it occurs this year or sometime in the future. Most people will see a few recessions in their lifetime, so it is wise to be prepared for them. Taking these steps before a recession makes it likelier that you will not be as affected by a downswing in the economy.

Three ways to recession-proof your finances include:

  1. Eliminate Debt. When you pay off debts, especially those with high interest rates, you lower your monthly outflow. Lowering non-discretionary expenses will soften the blow of a reduction in income, or even a loss of employment. This is difficult to pull off during a recession, so you will need to decrease your debt when times are good.

  2. Cut expenses. By prioritizing your expenses, you get a better idea of where your money is going. Looking through your bank and credit card statements might be eye opening. Many people spend much more than they realize. You can also find certain expenses/subscriptions that you no longer need. Eliminating these expenses can save hundreds and even thousands of dollars a year.

  3. Build up your savings account. For some people, this is the hardest step. It is recommended to have an emergency fund that can cover three to six months of expenses. This will help tide you over if you lost your job or were injured and unable to work. Less than 25% of the U.S. population has set that money aside. In fact, almost 60% of Americans couldn’t come up with $1,000 in an emergency. These statistics show a glimpse of how recessions can snowball. Again, it is much easier to build this up when the economy is strong. Recession or not, an adequate emergency fund is always recommended.

Once you have started with these steps, you may find you want to add other preparations. There are several other ways to recession-proof your finances such as getting a side hustle for extra income, learning new skills, and diversifying your investments. You may find you are better prepared than you anticipated once a recession starts.


Don’t Neglect Your Retirement Account!

Keep contributing to your 401(k)s, IRAs, and other retirement accounts, regardless of the economic climate. Unfortunately, many people stop contributing to their accounts when money gets tight during a recession. But remember, your retirement accounts are for your future self, not your current one.

Retirement accounts are long-term investments. Their long term nature means they also will see a few ups and downs in the economy. Some important things to keep in mind regarding retirement accounts during a recession:

Don’t panic or act impulsively. It may be tempting to cash out during a downswing to avoid losing money. But if the market goes down, it will rise again. Investing guru Warren Buffet advises remaining steady and weathering the storm.

Continue contributing. Take counsel from your financial advisor as to whether or not you need to adjust your contribution levels, but the key is to continue contributing and stick to the plan. For those that have had retirement accounts through the dot-com bubble and the 2008 Financial Crisis, they can look back at contributions during those periods and will see that is where they show the largest gains.

Roth Conversions. If you have built up enough assets to where a recession doesn’t have a major impact, a Roth conversion can be considered. There are several factors to consider since the conversion will be taxable income. If those all align, then the result could be putting money into an account at a low point in the market with tax-free growth.

Put off withdrawals. If you are retirement age or close to it, avoid taking your distributions during a market downturn. You don’t want to start withdrawals when the principal has been reduced. Hold off as long as possible or until the economy picks up again and your account has had time to bounce back.


In Summary

In times of uncertainty, it is easy to panic and be reactive. Don’t let your emotions drive your financial decision making. Instead, continue to think long-term, stick to the financial plan you have in place. The financial plan is designed and has allowed for inevitable recessions. You can take the above measures to recession-proof your finances and ride out the storm with confidence.

Do you wonder if you are on the right track financially? Perhaps your plans need an expert opinion. We’re here to help you!