How to Protect Your Finances So You Are Prepared For a Potential Recession in the Future
You should always be looking to protect your finances. Very few people are ever truly prepared for a recession. How many people could have predicted the financial crisis of 2007-2008 or the economic downturn associated with the COVID-19 pandemic? When the economy is favorable, few people want to think about tough financial times. However, one of the best ways to protect your finances is to plan for a rainy day.
In this article, we’ll explain how you can protect your finances so you are prepared for a potential recession in the future. Recessions are a natural part of the economic life cycle, so one is bound to happen again. Keep reading for important tips so you’re not helpless when the economy takes a hit.
1. Start repaying your debt
Your debt may seem like an annoying burden now, but imagine how heavy it will feel during a recession. If you haven’t already implemented a debt repayment plan, now’s the time to put one in place and protect your finances. As long as you’re earning an income, you can repay your debt consistently. No one wants to imagine losing a job, but an economic recession could create job insecurity and compromise your ability to pay your debts.
2. Invest in yourself
What can you be doing today to make yourself more desirable on the job market tomorrow? When it comes to your career, you should never be standing still because you can’t predict how the economy will one day affect your industry and your role. If you’re able to diversify your skill set and increase your knowledge, then you’ll be prepared to handle any challenge that comes your way and feel ready to pivot when necessary.
3. Keep Investing
When it comes to investing, your money has and always will be at the mercy of the stock market. With that being said, people always panic when they see the stock market falling. It may seem counterintuitive to keep investing, but this is exactly what you should be doing. In order to give your investments a shot at outperforming the current situation, you need to keep investing regularly.
One of the easiest ways to make sure you are taking care of your investing is to set up a recurring recurring transfer to your IRA account or brokerage account. If you have other investment accounts like a 401k, you should continue to contribute to this as well. If you do this, you will be on course once financial recovery happens.
4. Cut back so you can live within your means
We are all guilty of it. Indulging in all kinds of areas and spending money on those lattes and dinners out with friends. All this spending, no matter how small the amount, adds up over time to big sums. With that being said, there are so many ways you can save in these areas. Meal prepping and buying a coffee maker are just two ways you can help yourself save more money.
So how much should you be spending on non essential items? If you follow the popular 50/30/20 rule of spending, you would want to spend no more than 30 percent of your net income (that is, earnings after taxes) on discretionary items. This of course depends on your income and what your budget looks like. All your essential expenses like rent, insurance, food etc. of course gets handled first.
5. Focus on saving
One of the most obvious ways to prepare for a recession is to bolster your savings, so you have money set aside for a rainy day. This will help you feel confident and secure even when the economy is depressed. When the economy is flourishing, many people spend their money carelessly because they’re riding the high of favorable times. They take more frequent vacations, and they go out to eat more often instead of cooking cost-effective meals at home. However, this is the time when you should be adhering to a budget and creating goals around saving. During a recession, you likely won’t be able to save any money, so you may as well pad your account while you can.
Are you worried about how you’ll manage in a future recession? What steps are you taking now to prepare yourself for the possibility of financial hardship? The topic may not be a comfortable one, but it’s essential to broach.