How to Protect Your Finances in Case of a Recession
How to Protect Your Finances in Case of a Recession
By Emily Guy Birken November 12 2019
According to the financial news sector, it seems probable that we're headed toward a recession. Grim-faced economists think our current historic economic expansion is headed for a fall, and the news of a looming recession couldn't feel scarier.
There's good news and bad news about these opinions. The good news is that no one has a crystal ball, which means even the savviest of economic forecasters can't possibly know what our economy will do in the future. However, we do know that certain financial trends cannot go on indefinitely. (Remember in 2007 when we all thought housing prices could only ever go up? We learned the hard way in 2008 that nothing keeps growing forever.)
So how can you prepare for a recession that may or may not happen in a time frame you can't predict? Thankfully, there are a number of actions you can take today to protect yourself, and your finances.
Bolster Your Emergency Fund
Financial experts recommend that everyone build an emergency fund that could cover three to six months' worth of expenses. Your emergency fund can get you through a period of unemployment until you land your next job.
However, losing your job during a recession could be a little more dire than losing it at any other time. When the economy as a whole has taken a hit, it can be much more difficult to find another employer who is hiring. This is why the median unemployment length during the recession was more than 25 weeks (nearly six months), whereas the current median length of unemployment is just over 9 weeks.
Now is an excellent time to add to your emergency fund. Start an automatic transfer to your savings account with every paycheck, and look for other ways to beef up that fund.
If you don't have an emergency fund that could handle a lengthy unemployment, there's no need to panic. Remember: anything you can put away will be helpful if you do find yourself with a pink slip.
Create Your Plan B Budget
Another proactive step to take is to map out what would change about your spending habits if you were to lose your job or take a pay cut. Going through your current budget and identifying the items you could cut can help reassure you that your emergency fund will weather a loss of income.
You could even challenge yourself to make some small cuts now and see if you miss your former expenditures. That can free up some extra money (more for the emergency fund!) and help you feel more in control of your spending now and in the future.
Attack Your Credit Card Debt
If you're carrying a balance on your credit cards, now is a good time to get aggressive with your payoff plan. Carrying debt into a recession could make for an overwhelming burden if you experience a pay cut or a layoff. You'd hate to find yourself unable to pay your credit card bills — and have to deal with debt collectors — when you're already feeling financially stressed.
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