How To Prepare for a Recession, According to Finance Pros

With talks by a recession is imminent (or already here?), now is the time to get our financial well-being in order and have a plan to prepare for possible changes. This is especially important for people who are already living very budgeted lives or just getting from paycheck to paycheck. For help, we turned to two financial professionals. Below, expert in consumer finance and budgeting Andrea Woeroch and Colleen McCreary, credit karma‘s Consumer Financial Advocate six ways to prepare for a recession.

Create a budget

First, McCreary recommends creating a budget. Don’t think of it as deprivation; Think of it as a tool that gives you more control over your money. At the most basic level, McCreary says that a budget helps you understand how much money is coming in and going out each month. This information allows you to appropriately allocate your funds to meet your financial goals and avoid overspending. And most importantly, a budget helps you be accountable. “By creating a roadmap and setting intentions around your spending, you increase your chances of hitting your budget goals,” she says.

Contribution to an emergency fund

Next, McCreary advises working on building an emergency fund if you don’t already have one. Recession or not, it’s always a good idea to save money to cover unexpected expenses that inevitably crop up (because life does). Ideally, McCreary says, everyone should have enough money in their emergency savings to cover three to six months of living expenses. However, she concedes that’s not the reality for people living paycheck to paycheck. In these cases, McCreary recommends saving as much as you can from each paycheck, even if it’s a small amount, and steadily working toward your goal.

Lower your cost of living

One way Woroch recommends finding funds for your emergency savings is to lower your monthly living expenses. “Spend time checking your bills for services you don’t need or comparing rates to competitors, as you may be able to save more by switching,” she says. For example, Many people spend money on unnecessary unlimited data plans for their phones. The same applies to car insurance. Woroch and McCreary recommend shopping around and negotiating better prices. Every little you can save counts.

Diversify your income

In addition to lowering your cost of living, increasing your income will also further strain your budget. Specifically, Woroch suggests creating multiple income streams as a strategy to recession-proof your finances and create more financial security. If you have additional income streams on the side, you can lean on these sources should your main source take a hit (i.e. you lose your job) without having to draw on your savings or take on debt to make ends meet. “Even if you don’t have that much extra time to build a side business, there are flexible side hustles that almost anyone can do in their free time,” says Woroch. Examples of this are tutoring, looking after animals, going for a walk or offering services as a freelancer.

pay off debts

With interest rates rising, one of the most important ways to prepare for a recession is to focus on paying off debt, especially credit card debt. “It’s best to prioritize debt with the highest interest rates — a repayment strategy known as ‘debt avalanche,'” says McCreary. “That’s because credit cards tend to have higher interest rates than other types of loans, like personal loans or student loans, making them a strong place to start as you embark on your debt-paying journey.”

In other words, focus on paying off high-interest debt first. If you carry high-interest debt across multiple credit cards, Woroch recommends consolidating with a low-interest personal loan or transferring the balances to a zero percent balance transfer card, which can give you 12 to 21 months to pay off the debt with no interest fees.

Enjoy cashback rewards

However, there are some advantages to using credit cards, such as: B. Cash Back Awards. According to Woroch, the key is finding a credit card with cashback benefits that fits your spending style. For example, if you spend a lot on online purchases, choose a credit card with a higher cash back rate for things you buy online. Or you can opt for a credit card with flat-rate cashback on all purchases.

Woroch adds that you can also use other tools to further increase your cashback earnings. For example, she recommends using the Get the rewards app, which rewards you with points for scanning receipts. You can then redeem these points for gift vouchers. Cash back plug-ins such as Rakuten You can also earn money for online purchases that you have already wanted to make.

All in all, incorporating these changes into your financial wellness routine can go a long way in preparing your financial situation for a recession — or whatever else might happen.