Rising interest rates, skyrocketing gas prices, turbulent markets, and inflation at a 40-year high are multiple key indicators foreshadowing a potential recession. Some are going further by stating, “There’s no question in my mind that we’re in a recession. Maybe the economic and technical definitions of a recession haven’t hit yet but we’re there” says Howard Dvorkin, Chairman of Debt.com and personal finance guide.
Whether we are in a recession, or it is impending, or perhaps, we avoid it altogether, it is always prudent to plan for the worst and hope for the best. Let’s discuss how to plan a budget for any economic condition. Increasing your savings, re-evaluating investments, and managing debts are key opportunities to get ahead of any unexpected events. However, it is also important to avoid making decisions based on recessionary fears which can worsen your financial standing in the long run. Here are a few tips you can consider to hopefully minimize the impact of a recession:
Save More
As a rule of thumb, a percentage of your paycheck should go towards your savings. But now is the time to increase this percentage by cutting down on unnecessary expenses. You may want to delay that vacation you were planning or keep those home renovations on hold until absolutely necessary. Also, make sure that these savings are liquid and can be accessed in a time of need. Which means don’t invest or hold these funds in a way where access to them is restricted, like in a CD (Certificate of Deposit), for example.
Pay Off Debt
With rising interest rates, make it a priority to get rid of non-mortgage debt, with a special emphasis on debt with variable interstate rates that are likely to rise as the Fed continues raising interest rates. Focus on contributing more of your income to debt that holds the highest interest rates. For example, credit cards already have notoriously high-interest rates, but as the Federal Reserve continues to raise rates, carrying a balance will become even more costly. Another point to remember is that you should consider paying off debt that has tax-deductible benefits, like educational loans. For other debt reduction strategies, see our previous blog titled, How To Tackle Debt Effectively.
Emergency Fund
Apart from savings, build your emergency fund for a rainy recession day. Ideally, 20 percent of your income should go to your savings, and 30 percent to extra expenses like your subscriptions and memberships. After slimming down your extra expenses, set up higher automatic payments to your emergency fund. This fund can also come in handy in case of job loss with a goal to keep you going for at least 6 months without a paycheck.
Become the Employee Your Next Job Needs
If you start seeing a wave of layoffs in the news and get a sense that they may soon be coming to your company, get a step ahead by upskilling and updating your resume. Remember that individuals with higher experience drawing handsome salaries are more under threat than their younger counterparts who represent lower overhead for the company. There is a wide variety of upskilling resources available on the Internet. Here are some examples of resources you can investigate. But whatever you choose, start as soon as possible.
Reassess Your Investment Portfolio
Considering the volatility of the current stock market, you may want to consider diverting more of your funds towards investments with the least risk despite a lower rate of return. If you have enough cash on hand to cover six months or more, start looking further into the future and use today’s economic conditions to your long-term advantage. It might be time to consider investing at a discount today since markets are coming down.
Another strategy is to invest in passive income, which can be used to augment savings, as a rainy-day fund, and for long-term retirement income. Here at Defynance, we have launched a passive income fund that is projected to offer low volatility, like fixed income but with higher returns like with equities. Learn more at our Fund website.
While no one can accurately predict how future economic events unfold, the above strategies can certainly give you a fighting chance to face and overcome the approaching recession.
