A recession hasn't been declared at this point in time. This is because a few months' worth of evidence must be collected before one can be declared, which isn't something that can happen in an instant. Still, it seems safe to say that a lot of people believe that we are either in a recession or heading into a recession. Something that increases the chances of one happening. After all, people's expectations for the future have a huge impact on their purchases. Thanks to that, the belief in a recession can have the characteristics of a self-fulfilling prophecy. As such, now is the time to start recession-proofing.
1. Remain Calm
For starters, it is important to remain calm. Recessions tend to be unpleasant to say the least. As a result, it is very understandable for people to feel fear, anger, and other negative emotions at the thought of having to weather one. However, becoming worked-up won't help them recession-proof their finances. Instead, remaining calm should make it much easier for them to figure out the best way to handle things. Something that can make a significant difference in the long run.
2. Establish an Emergency Fund
It is extremely important for people to have an emergency fund. No one can say for sure what the future will be like, so no one can say for sure that they won't run into any problems. Emergency funds aren't meant to cover such situations, thus preventing people from being kicked into a downward financial spiral. Generally speaking, people are supposed to have enough money saved up to cover three to six months of living expenses. However, even a single month's worth of living expenses can be very helpful under a wide range of circumstances.
3. Pay Down Debt
If possible, people should try to pay down their debt. Every dollar of income that goes towards their monthly debt payments is a dollar that won't be there if they run into trouble. By paying down their debt, people can put themselves in a better financial situation, which will be critical when entering into bad economic times.
4. Focus On Higher-Interest Debt
Speaking of which, people should prioritize paying down credit card debt and other kinds of higher-interest debt. This is because each dollar that goes towards higher-interest debt means creating more room in their budget when compared with each dollar that goes towards lower-interest debt.
5. Be More Careful When It Comes to Lower-Interest Debt
Simultaneously, people should be more careful when it comes to paying down their lower-interest debt. Essentially, if their finances are tight, they shouldn't stretch it for the sake of paying down as much of their lower-interest debt as possible. Instead, people need to weigh paying down their lower-interest debt with other important concerns such as building up an emergency fund because the latter might be more important when entering into a recession. Of course, if they are doing well from a financial perspective, they should feel free to pay down their lower-interest debt to put themselves in an even better financial position.
6. Keep Your Credit Score High
Lenders become more risk-averse during bad economic times. After all, they have an increased chance of losing their money, meaning that they will act more conservatively in order to protect their financial interests. As a result, if people want to get a financial product for whatever reason, they are going to need to have a high credit score in order to get anything with decent conditions.
7. Communicate with Your Creditors
If people are already experiencing financial difficulties, they should communicate with their creditors. Generally speaking, they shouldn't lose anything. Instead, communicating with their creditors might enable them to work out some kind of arrangement for the good of both parties. Something that can work out because creditors might be willing to take a smaller hit to prevent a customer from defaulting altogether.
8. Invest For the Long Run
Recessions are unpleasant. However, recessions are also a regular part of the economic cycle, meaning that they come and go. Prolonged recessions do happen from time to time, but they aren't as common now as they were in previous centuries. As such, interested individuals should invest for the long run rather than the short run, meaning that they shouldn't be too spooked by falling stock prices in the immediate future because the overall direction of the stock market has been consistently upwards from a long-term perspective. If they sell after their stocks have taken a beating, they will lock in their losses. Instead, they should consider waiting for the overall direction of the stock market to change.
Diversification is one of the most popular ways to protect an investment portfolio during bad economic times. Essentially, the idea is to spread wealth throughout various kinds of assets rather than concentrate it in a single kind of asset. That way, even if something bad happens, it won't hit everything in the investment portfolio with the same force. Unsurprisingly, counter-cyclical assets are very popular hedges for people who are concerned about a recession because they tend to move in the opposite direction of general sentiment. To name an example, a lot of people start looking into discount retailer stocks during bad economic times because their low prices make their products more popular for more people. Be careful about going for assets that are generally believed to be counter-cyclical in nature but might not be so. Conventional wisdom on such matters is sometimes right and sometimes wrong, so it is important to check the numbers to make sure.
10. Figure Out What Can and Can't Be Cut
On a final note, people should draw up a budget of their regular spending so that they can get a good idea of what their money is being spent on. Once they have done so, they should then separate their expenditures into those that are necessary and those that are discretionary. If people run into financial problems, that will tell them what they should start cutting back on.
Written by Allen Lee
Read more posts by Allen Lee