How to Prepare Your Finances for a Recession

 

 

Steps to Prepare Your Finances

Get the Full Picture

The very first step that you will want to take to prepare your finances for a recession is to get an accurate picture of where you stand today.  Many people have no idea how much you are actually worth (or in debt). To make a solid financial plan, it is imperative that you start with the truth.

To start, get a piece of paper and calculate your net worth.

On one side of the paper, list all of your assets.  Include any bank accounts, 401k accounts, other retirement accounts, value of vehicles or other equipment, value of your home, and any other asset that you own.

On the other side of the paper detail any debt that you have.  This should include your mortgage balance,  vehicle loan balance, credit card debt,  money owed to friends or family, etc.

Now you will want to subtract your debts from your assets to calculate your net worth.   If it is positive, that means that you own more than you owe.   If it is negative, that means that you owe more than you own.    It’s important to understand this figure as it gives you a good gauge of your overall financial health.

In addition to calculating your net worth, you will want to identify any liquid assets.  A liquid asset is cash or something that you can easily convert into cash.  Your liquidity is essentially the amount of cash that you have available to pay bills and expenses.   In a recession, having liquid assets is good because it means in the event that you lose your job, you will be able to cover your bills relatively easily.

Develop a Budget

The next step in recession-proofing your finances is developing a budget.  A budget serves many purposes. For one, it gives you a very clear view of your finances.   Have you ever wondered where your money goes every month? With a budget, you will know exactly where every dollar goes.   A budget also helps you determine how much you will need in your emergency fund.  

As soon as you sense a recession, it’s time to start a budget. There are millions of budgeting tools out there that you can use. My advice is to keep it as simple as possible.  A blank sheet of paper works just as well as a fancy piece of software for most people.

In a nutshell, you will want to list your income and subtract your expenses.   If the remaining number is positive, that is good news and means that you have money remaining each month to pay down debt or put into savings. If the remaining number is negative, this means that you are spending more than you are earning.  You are likely relying on credit card debt or eating into your savings which is not good for your financial health.   If you are you in this situation, you will want to assess your expenses and look for opportunities to save money and spend less.

Figure Out Your Emergency Fund

After you develop a budget,  you can now figure out how much should be in your emergency fund.   An emergency fund is just like it sounds, it’s a savings fund that can be used for emergencies such as loss of a job, hospital bills, or anything where you would need to pay a large sum of money out.   An emergency fund is the most important step to surviving a recession and securing financial well-being.

Most experts suggest that you keep at least 6 months of expenses in your emergency fund. This will help you weather a loss of income until you can get back on your feet.   To figure out the amount you will need, simply take the number of your total expenses (your total expenses from the budget you created in the step above) and multiplying that by 6.

For example, if your total monthly expenses equal $2,000 then you should have $12,000 in your emergency fund ($2,000 x 6).

Fund Your Emergency Fund

If you are like most Americans, you may not have the required amount in your emergency fund just yet. If you don’t have that much saved already, it’s time to start saving.  The amount required for your emergency fund may seem daunting, but it is possible, even if you are living paycheck to paycheck.

First, go back to your budget and figure out where you can cut some expenses to start saving more money.   Become very frugal if you fear that a recession is coming on. Limit your eating out,  use coupons to cut your grocery bill, and find free or low-cost entertainment. Look for any opportunity to start saving money and plow that money into your savings account instead.

You should also look to increase your earnings in order to save for your emergency fund.   Picking up a side hustle or working extra hours at work can help you put extra money directly into your saving account.

With the gig-economy in full force, it has never been easier to earn extra money. If you need side hustle inspiration, check out the $100 Startup or 100 Side Hustles both by Chris Guillebeau.   He provides such practical and easy strategies to increase your income quickly and effectively.

Another great way to fund your emergency fund is to sell your unused things. You likely have something laying around that you don’t use anymore that could bring in some cash.  Old designer purses, unused technology, old toys, and clothes are all great ways to bring in some cash. Sell these items on sites like Craigslist or LetGo to earn some money and clear out clutter.

Update Your Resume

Even if you love your job, it’s always important to have an updated resume.  You never know what life will throw your way (like a viral recession caused by a global pandemic).

Ensuring that you have an updated resume and updated LinkedIn profile can give you a head start in the event that you lose your job.

You should also look to keep connected to your external network.  Start casually connecting with old work friends,  comment on acquaintances LInkedIn post, anything that you can do to stay connected to people.

Hopefully, you won’t need to utilize your network or resume to seek out a new job but it’s never a bad thing to be ready.

Pay Off Debt

Another smart way to prepare your finances for a recession is to pay off as much debt as possible.  if you are in a good place with your emergency fund, take any extra cash and start paying down any debt.

I’m a big fan of Dave Ramsey’s Snowball method for paying off debt.  The snowball method is basically paying off your smallest debts first, regardless of interest rate.  This is especially smart if you have a lot of different debts. This method can help you free up cash by eliminating payments that are going out each month.

This method is also very motivating. Once you start paying off debt it gets you energized and encouraged to keep at it.  My husband and I  personally used this method and we.have paid off all of our debt including our mortgage in just 6 years. It was difficult, but it is possible.

One of the biggest things I  hear is “I don’t have the money to save”.  Well, that is the whole point. You will never have the money to save if you don’t change something. You have to make small changes and nothing should be more motivating to make these changes than the risk of an economic recession.

Your future self would be very grateful for any steps that you take today.

What are you biggest roadblocks when it comes to finances?   Have you taken any steps to prepare your finances for a recession?

 

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