With one-quarter of negative GDP growth behind us and a recent negative second-quarter GDP growth projection from the Atlanta Fed, it looks like the U.S. economy is likely facing a recession if it isn’t in one already. We’ll have to wait until the official numbers are released to know for sure.
Even if we aren’t technically in a recession, the economy is certainly slowing. With that in mind, what is your best course of action to prepare for a recession? Rather than making big changes today, your focus should be on making a plan. Here are five steps you can take today to create your recession contingency plan and strengthen your finances.
1. Tighten Your Budget
It would be a cliché to tell you to give up your cappuccinos. Plus, I love coffee and one cup every now and again isn’t going to move the needle. However, it wouldn’t hurt to tighten up your budget a little bit. While it can be tempting to take cost-cutting to an extreme, overly drastic measures will also reduce your quality of life.
As far as actions to take today, look for any easy and obvious ways to lower your spending. Do you really watch Hulu? When was the last time you went to the gym you’re paying $24 a month for? If you’re not worried about the prospects of being laid off from work, small changes are the best move, especially if you’ve already done some budgeting.
If there are any budget items that you feel do not enrich your life, those are the items that should be on the chopping block.
If you are concerned about your job or are stressed about a possible recession, now is the time to make a contingency plan rather than cut your spending indiscriminately. In this age of working from home, would it be possible to sell a car and become a one-car household? This could take a large chunk of expenses out of your spending.
From there, start making a list of your non-essential expenses, in order. However, again, consider the quality-of-life implications of each decision. Think cutting cable TV over a vacation, although some family members may argue otherwise.
Is there a way that you can live on your spouse’s income? Be sure and include your spouse in the planning – working as a team makes getting through tough times much easier.
2. Pay Down Your Debt
After you’ve tightened up your spending, it’s time to focus on reducing your debt. There are many methods of doing this, from focusing on the highest interest rate debt first to Dave Ramsey’s method. Choose whichever one works best for you.
I recommend paying down all your credit card debt first. Cards tend to have the highest interest rates, so any unpaid balances accrue interest awfully fast. If you pay them off every month, no worries.
From there, tackle other non-housing loans such as car loans. These types of loans should be prime targets for your contingency plan – if you lose your job, would you be able to sell your car and purchase a less expensive one? Certainly, if you’re upside down on a car loan, make a plan to get right-side-up as soon as possible.
3. Build Up Your Cash Reserves
Once you’ve tackled your budget and created a plan to pay down your debt, the next step is to build up your cash reserves. The rule of thumb for an emergency fund is three- to six months’ living expenses if you’re still working. I still think that’s a great rule-of-thumb.
However, if you’re stressed about the economy or concerned about being laid off, it’s time to stretch that number out from three-months worth of cash to six. If you’re closer to retirement, maybe you want a little more than that.
As you build up your cash reserves, do so with your current cash flow if possible, which leads us to our next step.
4. Don’t Change Your Investment Strategy
We’re two quarters into 2022 and the recession hasn’t officially been called. However, the stock market has already taken a nosedive. Market movements tend to be leading indicators for the economy. So, if you didn’t already have your investments positioned defensively prior to the beginning of the year, it’s probably best to stay invested with your current strategy.
Any investment strategy changes you make need to be made far ahead of when the recession starts. The backward-looking nature of the official data makes timing those changes very difficult. I will say that no one knows what we can expect with the markets from here; the perfect moves will only be apparent in hindsight.
If you’re uncertain if you’re investments are positioned right, consult with a fee-only financial planner first before making any changes.
5. Look for Other Income Opportunities.
After culling the budget, paying down your debt, and increasing your cash reserves, you may still be stressed about the economy. Up until now, we’ve primarily focused on the spend-side of your cash flow. Of course, there are things you can do on the income side as well.
Having another source of income – or one waiting in the wings – can take the stress off your budget and your mind. These days, there are plenty of opportunities to moonlight from the comfort of home thanks to resources like Upwork and Fiverr. I even have a friend who decided to work part-time at a neighborhood restaurant because they were short-staffed. He loved the place, and the kids were already out of the house.
There are plenty of ways to add to the income side of the equation if you get creative. While you don’t necessarily need to start earning extra income today, it’s smart to have something in mind for your contingency plan.
Prepare for a Recession: Mindset
You may go through this process and find that you’re on solid financial footing. Simply having a plan can take the stress off your mind, knowing you’ll be prepared even if the worst happens.
Creating a recession contingency plan is all about having the right mindset. It’s less about stressing over the worst scenario than it is about knowing the risks and understanding that you’ve made reasonable preparations for them.
Remember that recessions are a natural part of the economic cycle. It’s a recession – not the apocalypse. We will eventually get through it and into the next growth cycle. The idea is to have the smoothest experience possible.
If you want to prepare for a recession and need help, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.
As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.