Disclosure: This post contains links to Honest Policy, an insurance quoting service and learning resource. I am a paid writer for Honest Policy. I’m including their links here because I truly believe in the company’s mission statement — which is anchored on bringing integrity into the convoluted business of insurance.
After more than a year of super-high prices and a weak stock market, the bad economic news keeps coming. In March, three U.S. banks collapsed in the same week — raising the chances of an economic downturn later this year.
If there’s ever a time to learn how to prep for a recession, it’s right now.
Recession hits the average household hardest with job loss. A recession, technically, is an economic contraction. The country as a whole lowers its output of goods and services. That reduction goes hand on hand with higher unemployment since lower output requires fewer workers.
When you prep for a recession, then, you are essentially building your financial resilience — so you can manage through a temporary income loss. If you like the way that sounds, implement the eight magic money moves below.
1. Build your cash savings
You know the drill. You need a cash emergency fund. Those cash reserves keep you from turning to credit cards if you lose your job.
You should target a cash savings balance that will cover at least three months of your living expenses. That’s probably 25% of your annual income. Admittedly, saving up that much is no small task. If you’re starting from zero and saving 5% of your paycheck, it takes five years to reach the 25% target.
Don’t be discouraged by that timeline. Having a small cash balance on hand is better than having nothing. Plus, there will surely be more recessions later, so your efforts won’t be wasted.
As a backup plan, you can investigate low-cost sources of debt, such as your rich aunt or a home equity line of credit. Turn to those if your finances go south before you can get your cash savings in order.
2. Lower your living expenses
Cutting back your living expenses now will lessen your dependence on that cash emergency fund. Remember that if you get laid off, you should qualify for unemployment income. Lower your expenses by enough to survive on unemployment alone and the cash on hand becomes less important.
Whether that’s a realistic goal depends on where you live and the composition of your living expenses. For context, maximum weekly unemployment benefits range from $275 weekly in Alabama and Florida to $1,015 in Massachusetts.
How to cut your living expenses
Household spending categories that have the largest savings potential include food, insurance, and discretionary services like high-priced salon visits. Rent may also be an opportunity, if you don’t own your home and you don’t mind moving.
- Cutting food costs: To trim your food budget, eat out less, buy generic products, and shop from your market’s weekly sales.
- Cutting insurance costs: To save on insurance, get new quotes for your auto, home/condo, or renters insurance. Also review common discounts for homeowners and auto insurance. There may be some discounts you should be getting but are not. Inquire about them with your existing provider and any prospective providers.
- Cutting spend on discretionary expenses: Review your spending over the last couple months on things like coffeehouse visits, haircuts, clothes, and personal care products. You might be shocked at the numbers. You’ll see quickly where you can cut back.
- Cutting rent costs: If you’re open to moving, research lower-priced rentals to see if they suit your location and living standards.
3. Get a second income stream
Diversifying your income is always a smart move. You can get a second job, start a side hustle, or move into income-producing assets like dividend stocks.
Side hustles are often the most appealing of those choices because they are more flexible than a job and have lower start-up costs than dividend investing.
The biggest challenge with a side hustle may be deciding what work you can do. Try browsing gig websites like Upwork and Fiverr to see what services people are selling. You might be surprised to find there’s a market for your area of expertise.
4. Collect on banking offers
Banks lure in new customers with incentives. The common ones are cash bonuses for new savings deposits and zero-interest balance transfers. If you have access to those offers, consider taking advantage of them where it makes sense.
New savings account incentives
Free money for opening a new savings account can help you build up your emergency fund. That perk could be worth a couple hundred bucks, depending how much you put in the new account.
Just remember to link the new account to your checking account, so you have access to those deposits. And while you’re at it, set up an automatic transfer to keep building your cash balance.
Zero-interest balance transfers
Zero-interest balance transfers help you pay down debt faster. You’ll usually pay an upfront fee of 5% or so. But if you pay the debt down to zero before the promotional period ends, you come out ahead.
What I like to do with these is divide the transferred balance by the number of months remaining on the zero-interest period. Then schedule automatic payments for that amount. Or, to be really aggressive, put that amount less the card’s minimum payment into a savings account. Make the minimum payments directly to your card company. Then, just before the promotional rate expires, pay off the credit card balance from your savings.
5. Take on more responsibility at work
The best way to prevent a layoff is to make yourself indispensable at work. Volunteer for high-profile projects and added responsibilities. You can ask for a raise in the process, but you could also just do the work. If the extra value you provide saves your job later, it will be worth it.
6. Reassess your insurance coverage
Insurance lowers your out-of-pocket costs on emergencies. If you suspect your job could be impacted by layoffs this year, it may be smart to lower your insurance deductibles temporarily. Your premiums will be higher, but the change should protect you in the worst of circumstances — which is when you lose your job and wreck your car in the same week.
7. Reevaluate your retirement savings plan
Saving enough money to retire comfortably takes decades. Plus, the money you save and invest today is likely to produce nice returns for you, just as soon as the market bounces back. I say this because I don’t want anyone to abuse this next bit of advice.
If you have no emergency fund, no access to low-cost debt, no second income, and live paycheck-to-paycheck with a job that’s subject to layoffs, you may want to pause your retirement savings.
Here’s the logic. You should only invest money you’re not going to need for at least five years. If your finances and your job are on shaky ground now, there’s a good chance you will need the money. And investing in your retirement account, then taking a hardship withdrawal in six months can be more expensive than not investing at all.
So in the most dire situations, consider pausing retirement contributions temporarily to shore up your finances. Just know that when you get back to those contributions, you need to raise the amount you’re stashing away. That’ll help you make up for lost time.
Recession-proofing your finances
Now that you know how to prep for a recession, you’ve likely concluded that this is a long-term process. You’re right. There’s no easy fix for weak finances. For that reason, it’s ideal to adopt these strategies as a way of life. Do that and you’ll be financially ready for any economic crisis that comes our way.
Wednesday 29th of March 2023
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