How to recession-proof your finances
Recession talk is making the rounds on Wall Street, and now Main Street. The whispers of recession have become calls that are hard to ignore.
We’re seeing slowdowns in home sales and supply chain disruptions, while also witnessing job growth and stock market rallies – all of which beg the question, “Are we in a recession?”
It’s complicated. While there are some widely accepted indicators that may point to an economic downturn, it seems like this has been a bit difficult to call due to mixed signals in the US economy.
However, we will do our best here to explain what a recession is and how you can protect your finances when the effects of an economic downturn visit your home.
What is a recession?
Simply put, a recession occurs when economic activity generally declines. But how much decline suggests a recession? A widely accepted indicator of a recession is when there are two or more consecutive quarters of negative growth in gross domestic product (GDP), or the total value of what a nation produces.
The US recently had two fiscal quarters of negative growth, but analysts are reluctant to speak of a recession.
Even the White House has chosen to avoid the “R” word because a recession also takes into account other factors such as the labor market, consumer and corporate spending, industrial production and incomes.
Many industry analysts and major news outlets are now warning of warning signs of an imminent recession, but government officials have not yet joined them.
The White House explains that the National Bureau of Economic Research’s (NBER) Business Cycle Dating defines a recession as “a significant decline in economic activity that is spread across the economy and lasts longer than a few months.”
They monitor variables including “real personal income minus government transfers, employment, various forms of real consumer spending, and industrial production.”
How long does a recession last?
The good news is that recessions come and go, and the cyclical nature of economies is that they experience ups and downs. To even speak of a recession, the NBER depends on government data, which tends to lag behind.
According to the White House, this means we typically don’t know about a recession until after it’s over. If a recession does occur, it can last about ten months on average (opens in new tab).
7 ways to recession-proof your finances
Live below your means
One of the best ways to recession-proof your finances is to spend less than you make. Ideally, you use the difference to pay off debt, save, or invest.
Some people do this by reducing their expenses, increasing their income, or saving a spouse’s income while using the other income to pay bills.
Reduce your expenses
As you reduce spending, you may need to negotiate rates for your monthly bills, eliminate unused subscriptions, or intentionally spend less on discretionary categories like travel, entertainment, and so on.
You may need to downsize to a one-car household or limit some activities and hobbies to save money. Other ways to reduce your expenses could be:
- House hacking (sharing of housing costs)
- Cut the cable from your cable services
- Move to an area with a lower cost of living
- Downsize your home
Increase your income
Another way to live below your means is to increase your income. There are many ways to approach this. You could:
- Ask for a raise at your current job
- Move to a higher paying job or career
- Add a side hustle
- Sell things around the house for extra money
- Adjust your income tax deduction on your paycheck. (You will, however, receive a small refund)
- Acquire income-generating assets
Top up your emergency fund
If you’re unsure of your income or expenses, a good offensive step is to top up your savings. Having extra funds on hand can be a huge benefit when your income falls or your expenses increase.
This can prevent you from relying on debt to make up deficits in your budget.
pay off debts
Anyone who consistently pays compound interest on their debt obligations will quickly get stuck financially. To lower the interest you pay, aim to speed up your debt repayment.
Investing in asset appreciation
This might be a little tricky if your focus is survival, but if you have room in your budget, investing just a tiny fraction of your income can mean big rewards down the line.
If you work at a company with a 401(k) match from your employer, you can start your investment journey sooner rather than later and get a little help on top of that.
A recession often coincides with a downturn in the stock market or even the real estate market. If you can pick up these assets “for sale,” so to speak, you have plenty of leeway to reap the benefits when the economy recovers.
Take advantage of freebies and money that’s yours
Another option is to look for discounts and freebies, e.g. B. shopping during sales, collecting credit card rewards, or getting free stuff on your birthday.
With all the gas rebates and state stimulus payments announced this year, check your state’s government pages to see if you qualify for these payments.
You can also look at your state’s unclaimed funds website, which only requires a name to search for unclaimed properties.
Protect your finances
Although the threat of an economic recession may seem scary and unsettling, know that there are ways to stay in control. Take stock of your finances, gather facts and focus on protecting your savings.