Recessions happen, whether we want them to or not. But that doesn’t mean you have to fall off the personal finance wagon or suffer from money difficulties. Instead, here’s how to prepare for a recession to protect your finances.
What should you do before a recession?
In order to protect your finances during a recession, you need to prepare beforehand.
This includes;
- Saving more money, even if you have debt. Focus more on building up your liquid assets (ie. cash).
- Slow down on investments, especially if you are unsure about your future job security.
- Avoiding new debt, even if you’ve prepared for it before. Stay put and focus on what you have now unless you absolutely need to replace it (ie. getting a new car).
- Stock up where you can, including groceries, household items, and other items you may need in the future. This will help you be prepared should you lose your job or if items increase so much that you can’t afford them.
We’ll get into more details down below on other ways to prepare for a recession, but these tips can help you get started.
Related Article: Top 5 Tools to Organize Your Money This Year
What should I own in a recession?
There are two ways to look at this question; material items and investments.
If you’re looking at material items, you’ll want to continue living in a safe space, and having the other necessities — including food, clothing, and transportation. Basically, you want your four walls to be taken care of, so stick to the basics.
When it comes to investments, the safest investment you can have (short-term) is cash on hand. This is especially helpful if job security, home security, or extreme life changes are on the line. Experts suggest at least 3-6 months of expenses saved, but up to a year of expenses saved can be helpful. It can be hard to find a job in a recession, so prepare for it!
How do you prepare for a deep recession?
First, what is a deep recession? Basically, it’s a recession that threatens to go into a depression. So the economy may not bounce back as quickly, jobs will be hard to find, inflation will go up, and the like.
But, just like when preparing for a regular recession, you’ll follow the same steps for preparing for a deep recession. Save your money, avoid new debt, and remain calm. Luckily, our economy has always found its way out of recessions and depressions. It just takes time, so you’ll need to be prepared for that.
Related Podcast: Get Good With Money with Tiffany Aliche
How to prepare for a recession if you’re retired
It can be a bit harder to prepare for a recession if you’re retired, especially if you’re noticing your investments falling. But don’t panic. You can follow the same exact steps as everyone else to help you prepare.
But, there are a few other things to keep in mind. First, if your main source of income is Social Security payments, the first thing you want to make sure is that you can survive on that income with your current situation.
If not, can you cut your expenses? Can you move in with a family member or friend to save money while the recession is going on? Can you apply for grants or other financial help so you can afford food, transportation, etc? While there can be scary moments when retired in a recession, it is possible to save money.
Related Video: 7 Things NOT to do With Your Money During This Crisis
How do you handle money in a recession?
When it comes to handling money in a recession, you want to keep as much money in your pocket. But that doesn’t just include saving more.
One of the best things you can do for your finances is to check your spending and cut back if needed. This includes limiting eating out, keeping activities to a minimum, and canceling subscriptions that you’re no longer using. You can also find ways to cut back on living expenses, like shopping less for groceries and meal planning.
Next, if you have debt, focus on paying off just the high-interest loans. If you can pay the bare minimum on the rest, or skip payments without penalty, be sure to do that. You want to keep money in your pocket, but also avoid added interest that will be hard to get out of later.
During a recession, you just want to focus on survival, and keeping money in your account can help you do that.
Related Article: 10 Ways to Simplify Your Budget
What happens to your money in the bank during a recession?
Your money is completely safe during a recession as long as it’s in an FDIC-insured bank account.
The FDIC (Federal Deposit Insurance Corp.) is an independent federal agency that protects you against financial loss if an FDIC-insured bank or savings association (like a credit union) fails. This protection goes up to $250,000 per depositor and per account and includes checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs).
This also means that if you have a spouse, you could each have $250,000 in FDIC coverage per account, so $500,000 if both names are on a checking or savings account. And, you can do this with multiple accounts, although we don’t recommend keeping that much liquid cash on hand.
Should I pull all my money out of the bank?
No. It’s actually safer to keep your money in the bank so it’s secured. And if the bank does fail, your money will not be lost. Legally, it’s yours, and you’ll have to be paid back. This is a safer option than stashing your cash somewhere that it can be stolen or taken away.
How to prepare for a recession financially
Now that you know about what happens during a recession, here’s how to prepare financially.
Stay calm
First, stay calm. As we stated above, recessions happen. But don’t panic and sell all of your investments, “Yolo” your life, and fret about things that are out of your control. By remaining calm, you can keep a clear head and make better financial decisions that will aid you in the long run.
Save Money
As we stated before, be sure to save up to last a few months of living expenses. While the experts recommend 3-6 months, recessions have been known to last upwards of 18 months. So if you’re worried about struggling during that time at all, you may want to save even more.
Also, be mindful about where you’re putting your savings. Focus on putting the money into an account that you can access easily should you have to. But also, not too easy if you’re a spender and tend to dip into savings accounts.
We suggest saving your money in a high-interest earning savings account. Make sure that you can access it online, but that it’s not attached to a checking account that you use regularly.
Related Article: 11 Ways To Build Up Your Emergency Fund
Pay Off Debt/Avoid New Debt
While your primary focus should be saving money for future events, you can’t always skip debt payments or avoid them altogether. If you’re currently paying off debt, slow it down. You don’t have to be gazelle intense about so many financial priorities. Since saving money is important to avoid future debt, that should be the first step.
But, if you’ve saved a comfortable nest egg, paying off high-interest debt can be beneficial during a recession. This is because you’ll avoid having to make too many payments, thus keeping more money in your pocket month-to-month. But it also helps you avoid racking up extra debt due to interest rates.
If you have multiple high-interest loans or credit cards, you may also want to look into consolidating your debt. While this isn’t the best advice for everyone (depending on your financial situation), it can help you lower your payments, interest rate, and who you have to work with month to month.
Related Article: 10 Habits of Debt-Free People
Slow Invest
Last but not least, ease up on the investments. If you’ve saved money and don’t have debt (or at least high-interest debt), you may be wondering if you should use all of that extra money towards investments.
While investing during a recession can be helpful, especially once the economy starts bouncing back, it’s not wise to invest so much that you don’t have liquid assets on hand. In other words, don’t use your savings to take risks or invest, because you never know when you’ll need that money. Instead, give yourself a budget each month, like $200 a month, to use for investing purposes.
Related Podcast: How To Win The Wealth Game
Bottom Line: How to prepare for a recession
As you can see, it’s actually fairly simple preparing your finances for a recession. It just takes a bit of willpower and dedication to ensure that you’re being smart with your money and not making rash decisions.
No matter what, knowing how to prepare for a recession can save you a lot of headaches and phone calls, so start preparing now. And remember, millionaires are made during recessions!
