What Is A Recession?
In short, a recession is a period of a significant decline in economic activity. Pinpointing a recession considers several economic factors, including:
GDP
Personal income
Employment levels
Industrial production
Economic declines including any of these factors for several months in a row may be deemed a recession.
Are Your Finances Recession-Proof?
There are two categories you could land in once the “downturn” happens. First, you could be one of the 41% of people who feel like they aren’t prepared for an economic downturn. Or, according to the same poll, you could be one of the 74% of people saying they are “actively taking steps to prepare for an economic downturn.”
Ask yourself, “What category will I be in?”
Although the economy has shown signs of recovery, record-high inflation has experts keeping their eyes on the situation. You can’t control the market, but you can learn how to prepare for a recession and protect your investments from heavy losses.
Recessions can be difficult for some people to go through, but they’re not uncommon and should be thought about when you are doing your financial planning. The U.S. has experienced 13 recessions in the last 100 years since the Great Depression.
From your professional life to your portfolio, we have tips to recession-proof your finances.
Essential Steps To Financial Survival
If you want to be prepared for a recession (and life in general), you are going to have to look at your finances. I know, looking overspending can trigger a feeling of fear or anxiety for some. Fear is a very common emotion that stops people from taking the steps necessary to get in control of their finances.
But now it’s time to take control. Boss up, let go of fear and FACE IT. It will be worth it.
Identify Your Financial Priorities
We look over our finances first to identify our needs and financial health. This provides us with a foundation on which to build our finances.
Let’s start by asking and answering these questions:
Do you know where your dollars are going? If you are regularly looking over your bank and credit card statements, you will!
First things first, go online and pull up your statements. Most banks and credit card apps will automatically categorize your bills, but if not, you will write out your fixed and discretionary expenses on paper or use a computer app like Excel.
First, focus on fixed expenses. Fixed expenses are expenses that regularly come like rent, mortgage, utilities, childcare, etc. Write them down and add them up. Optional costs like streaming services and memberships are discretionary expenses, so do not include them. Pay close attention to grocery and clothing spending, which can easily cross over into discretionary if you are spending more on wants than actual needs.
Next, let’s write out all discretionary expenses. Notice trends or patterns over the past three months. Restaurants, vacations, streaming services, and coffee or fountain drinks are all discretionary items you can reduce or eliminate.
Now that you know where your money is going, are you overspending, or do you have a nice lump sum to put toward an emergency fund?
If not, reduce spending, increase income, or both.
Did you know that you can save hundreds of dollars monthly on car insurance, cable, cell, and internet services? I have personally saved over $100 per month by calling companies and asking for promos! Especially if I have been a customer for a good bit of time. With my internet service, I was offered a faster, better service for less.
Changing habits can save money, too. For example, reduce utility bills and help the environment by reducing power and water usage. Another great thing you can do is buy energy-efficient light bulbs and power strips. Check out our ebook for a few different saving and budgeting methods.
Can you pay off or reduce your high-interest debt? Credit card debt can cause some damage to budgets during a recession. That’s because to control inflation, the Federal Reserve will raise interest rates, which will increase the debt on your loans and credit cards. Your best bet might be to stop credit card spending immediately, if you’re using it for leverage that is a different conversation though.
Make an effort to pay down as many cards as possible before the end of the year, starting with the card with the largest interest rate rather than the largest balance. Look over your card interest rates and if you need debt relief, call the companies to see if you can renegotiate interest rates. Also, consider seeing if consolidation is for you.
Do you have an emergency fund? Financial experts typically say everyone should have three to six months' worth of bills put up in an emergency fund which is usually just putting your money in a fee-free savings account (not an investment account) that you can ignore until an emergency happens. *I think 8+ months of savings is ideal* Terry Turner, a writer and financial wellness expert for Annuity.com, says that six to nine months is enough to find a new job, even in a recession. “An emergency fund lets you pay your bills and day-to-day expenses without using credit cards or damaging your credit rating,” he says.
The amount of money in your emergency fund should cover your monthly fixed household expenses like housing, food, and utilities. It might seem impossible, but it isn’t, it simply takes commitment. The peace of mind you’ll gain when you’re financially structured is beyond worth the time it might take for you to gain control!
If you or your partner become unemployed, will you be able to meet your monthly obligations? In other words, can you live on one income?
HISTORY REPEATS ITSELF: The United States has experienced two recessions in the last 15 years: the 2020 COVID-19 recession and the 2008 housing crisis.
If you don’t already have emergency savings, start saving as much as possible. An emergency account can keep you if you lose a job, and it can also cover surprise expenses like car repairs. Having an emergency fund could have stopped me from becoming homeless when I did. Check out our ebook for a few different saving and budgeting methods.
Diversify Investments
A diverse portfolio is usually recommended to protect your investments from economic downturns and huge losses. A mix of hard assets, secured bonds, and stock investments can help you achieve long-term growth based on your risk tolerance and your financial goals.
Each investment type is going to give you different returns and will have different risks. I’ve learned that usually, you get higher returns with higher, calculated risk, and then lower returns with low-risk investments.
Diversification maximizes returns with high-risk, high-reward investments and then uses low-risk assets to secure your portfolio.
Historically Recession-proof Investments
Health care
Healthcare spending increased by 9.7% to account for 19.7% of GDP in 2020.
Examples: Pfizer | UnitedHealth Group | Johnson & Johnson
Consumer Staples
Demand for food and household goods remains stable or even increases during recessions as consumers reduce spending.
Examples: Procter & Gamble | General Mills | Kroger
Utilities
Utility stocks are heavily regulated and traditionally perform well during declines.