Have you been stressing out about the possibility of a recession? While it’s generally accepted that a recession is around the corner, one hasn’t been announced yet, and we’re not sure what to think of what 2023 will bring. Most of us see the writing on the wall as inflation continues to soar while interest rate hikes do little to bring the prices of everything in the economy down.
As much as I try to be optimistic about things, I also believe in being proactive because I don’t want you to be surprised if the economy enters a recession within the following year.
Let’s get on top of our finances, so we’re not in for a rude awakening if a recession comes this year. We’re going to look at how you can prepare yourself financially for a recession…
I’m not one to fearmonger, as the web is already filled with people who think the world’s ending. I believe in being annoyingly optimistic, which beats being negative and stressed out. However, there are times when you have to be utterly realistic with the current scenario and with what’s happening around you. It’s vital that you recession-proof your finances so that you’re ready for whatever life throws at you next. If I learned anything in the last few years, it’s that anything could happen. This is why we’re going to look at the possibility of a recession and what you can do right now to be prepared for it.
What you need to know about a recession…
The biggest issue with a recession is that it impacts everyone differently depending on what you do for work and other personal factors. While some industries are recession-proof (consumer staples, utilities, transportation, and a few others), other fields are directly hurt by a recession (travel, luxury items, and so on).
Here are a few things that you need to know about a recession…
Why a recession happens.
Sometimes it’s clear why the economy declines, and other times the economic downturn results from many complex factors contributing to the shrinking economy. These are a few reasons why a recession can happen:
- Economic shocks. Some major events (like the Covid-19 pandemic that led to a two-month recession) could trigger the economy into a recession.
- Rate hikes introduced by central banks to cool off inflation. A recession is often caused by the central banks raising interest rates to combat inflation with prices of everything going up. When the economy cools off, there’s no telling what can happen. The central banks may aim for a soft landing where they raise interest rates without tipping the economy into a recession, but that doesn’t usually happen. When you slow the economy down, this impacts every industry, from housing to jobs.
- Asset bubbles. We saw this with the real estate crisis in 2008 and what the fallout from the bubble bursting did to the entire economy.
Sometimes we see a recession coming; other times, it’s a complete surprise. Either way, we must be prepared for this because the good times can’t last forever. The bad times also don’t have to destroy you either. While there’s plenty more that goes into why a recession happens, this is just a brief overview of why the economy enters a downturn.
A recession is a normal part of the economic cycle.
When you were a kid, your parents likely told you that the good times won’t always last. This especially holds for the economy. There will be many more recessions in your lifetime, and that’s okay. What goes up must come down, and vice versa. While nobody looks forward to a recession, it’s not doomsday, and we can get through this.
You absolutely shouldn’t try to time the market.
“Everything is on sale.” — some guy who’s about to lose all of his money.
Trying to “buy the dip” is tempting when the stock market becomes volatile, but you’re trying to catch a falling knife. It’s crucial that you don’t take unnecessary risks because there’s no telling how long a decline could go on and how deep a recession could be.
This means there could be stock market sell-offs for a long time. If you need your money back in the near future, you will be stuck because it’s difficult to tell how long the situation could go on.
How will a recession affect me?
The recession or not 2023 debate is ongoing, and we don’t know what will happen next as the news unravels. Most of us are worried about a recession, but before we prepare for one, we have to look at how this economic downturn could impact us.
You need to prepare for the worst-case scenario.
When the economy cools off, there’s no way of knowing what that will mean for different industries and how you’ll be personally impacted. This means that you could lose your job and your benefits from work. Many companies will have to lay off employees when consumer spending goes down since there’s less revenue coming in. The unfortunate aspect is that this impacts even great workers as you could lose your job despite being a high-performer because you’re in an industry that isn’t recession-proof. In recent months, even established companies like Google and Microsoft have had to lay off thousands of employees.
Losing your job is the worst-case scenario because then you would struggle to pay your bills, you could get into debt, and you would certainly be spending less on luxury items, which would then impact the rest of the economy.
A recession will affect everyone differently.
The impact of the recession will depend on your starting point and how you’ve set yourself up. However, there are some aspects of a recession that you can’t control, no matter prepared you are.
Here are a few things to consider about a possible recession:
- The stock market usually drops due to high inflation, sell-offs, rate hikes, and overall uncertainty. This means that you could watch your investments dwindle. This makes it tempting to panic and start selling as well.
- Your debt payments would go up. When interest rates go up, you have to spend more on your debt payments (credit card, mortgage, and so on). This means your expenses go up, and you’re spending more money.
- Consumer spending drops. When people spend less money, companies report lower earnings and may have to lay staff off. You could either lose your job or get a pay cut.
There’s no telling how an economic slowdown would directly impact your life. Regardless of your current situation, you have to get proactive about your financial planning.
How do you prepare financially for a recession?
If you start planning right now, you can be prepared for whatever life throws at you.
Here’s what you can do right now to prepare your finances for a recession…
You have to get aggressive about saving up right now. How much you save will depend on what the situation with your employment is. If your job is in a recession-proof industry, you may not be as concerned about losing your paycheck as someone else would be. If you suspect that your job may be in jeopardy, you’re going to have to be ruthless about saving money right now.
Here are a few things to consider about saving up:
- Try to get 3-6 months’ worth of living expenses in an emergency fund. You want to be financially secure and ready to cover your bills if anything happens to your employment. You don’t want to panic about how you’re going to keep the lights on.
- You want money in the bank, just in case. It’s better to have more saved to handle the lean times. This is one of those situations where it’s better to be overprepared.
- You should save more money if your job isn’t secure. We keep on hearing about giant tech companies that are laying staff off. Many industries don’t have much security right now, and you’ll have to save more if you think you could lose your job.
How do you save up?
- Pay yourself first. Set it and forget it. I use the Houdini System to save money. When you automate your savings from your paychecks, you don’t have to worry about doing anything since it’s already done for you.
- Tap into a side hustle. This could be the best time to try out a new side hustle. More on this later.
- Consider selling stuff for money. Can you sell some items around your place? Do you have things that are taking up space at home? List something on Facebook Marketplace to add some cash to your emergency fund.
- Go through gift cards. This may sound silly, but we likely have money on gift cards we forgot about.
- Review your subscriptions. To beef up your savings account, you’re going to have to look through all of your expenses. The easiest way to save money is to cut out those subscriptions you don’t use anymore. I’m not telling you to cut your gym membership if you use it daily, but there are likely some subscriptions that you don’t get much benefit from.
- Negotiate your bills. Everything can be negotiated, and you can save money by reviewing your statements to see what can be changed. Just by calling your cell phone provider to ask for a better plan, you can save up to $20 per month. Most of these companies don’t want to lose you as a customer, so they’re willing to give you a better deal so that you stick around.
[Must read: How to add $1k to your bank account next month.]
Delay a significant purchase.
You’ll want to consider delaying a major purchase right now because it’s not the best time to hand over the majority of your savings in one shot. This is likely the most frustrating aspect of a recession in 2023 because we don’t want to delay something we’ve been saving up for, as many of us have already had to put life on hold. Sometimes, being patient and doing nothing is more beneficial to you, though.
Here are a few major purchases that you should consider delaying:
- Buying a home. With interest rates rising and real estate prices all over the place, this may not be the ideal time to get into the market as it’s unpredictable what’s going to happen next.
- Getting married. If you’re worried about losing your job, you may not want to throw that extravagant wedding at this time.
Any purchase requiring a large chunk of your savings account may not be the wisest move right now. It’s just not the right time to be spending lots of money. You also won’t get the best interest rate if you choose to finance this purchase.
Diversify your income.
I know how annoying it is to hear that you need to work more, but relying on one source of income is the riskiest thing you can do right now.
How can you diversify your income?
- Start that side hustle. We’ve covered side hustles extensively here. This could be the push that you need to pursue that side hustle. The good news is that a side hustle can be a fun project that you take on, and it doesn’t necessarily have to be a second job with full-time hours.
- Tap into the gig economy. As I was writing this, I heard from a friend bringing in an extra $400 this week from walking dogs on Rover. There are many opportunities to increase your income right now.
- Look for part-time work. This isn’t the sexiest idea, and you likely don’t want to hear that you should be working more.
- Upgrade your skills. You could use this time to upgrade your skills or to pick up a new skill.
If you’re worried about losing your job, you have to do whatever you can to upgrade your skills to ensure that you’re valuable no matter what happens in the economy. I know that this is easier said than done. It sucks because you could be in a field that you enjoy, or you could like your job. There are just no guarantees you’ll keep your job if the economy nosedive, and you have to plan accordingly.
Work on paying down your debt.
With interest rates going up, you’re going to be spending more money on your debt. This means that right now is the best time to get aggressive about paying down this debt.
How do you tackle your debt?
- Limit your credit card usage to focus on paying off your balance.
- Determine which debt payment strategy you want to use (highest interest rate first vs. paying off a quick balance).
- Become ruthless about eliminating your debt. There are no shortcuts here, as paying off debt is allocating as much of your money as possible to eliminate your debt.
Take advantage of this unique opportunity.
As frustrating as it is to have this recession looming over us, there are always opportunities in the chaos. You could use this time to learn a new skill, make a career pivot, or figure out the next step for you. This could be the push you needed to change jobs or pursue that side hustle you’ve been putting off for the last few years.
Maximize your life experiences.
I posted a picture of me riding an ATV in the summer, where I mentioned that the best investment for the rest of 2022 would be positive life experiences. I was only half kidding, but I knew deep down that there weren’t many great investment ideas coming.
How can you maximize your life experiences right now?
- Find joy in the simple things.
- Plan adventures on a budget.
- Focus on community.
Don’t forget to have some fun and create memories.
How do you prepare financially for a recession?
According to ChatGPT, here’s how AI would prepare financially for this potential recession:
There are several steps you can take to prepare financially for a recession:
- Build an emergency fund: It is recommended to have an emergency fund that can cover at least three to six months of living expenses. This can help you cover your basic expenses if you lose your job or experience a significant financial setback during a recession.
- Reduce your debt: Try to pay down high-interest debt, such as credit card debt, as much as possible. This can help you save money on interest charges and free up more money in your budget to use for savings or other expenses.
- Cut back on expenses: Take a close look at your budget and identify areas where you can cut back on expenses. Consider making changes such as reducing your dining out, entertainment, or subscription services. These small changes can help you save more money over time.
- Increase your income: Look for opportunities to increase your income, such as taking on a side job or freelance work. This can help you bring in extra money that you can use to build your emergency fund or pay down debt.
- Diversify your investments: Consider diversifying your investments across different asset classes and sectors to help reduce your risk during a recession. A financial advisor can help you identify the best investment strategy for your specific situation.
By taking these steps, you can better position yourself financially for a potential recession and be better prepared to weather any financial storms that may come your way.
Recession 2023 0r not: What’s Next?
What’s the final word on preparing for a recession? It will be a challenging period for many of us, with prices of everything going up due to inflation and the rate hikes possibly tipping us into a recession. You’re going to feel frustrated, and you’re not alone. I’m not here to leave you worried or pessimistic about the future. I want you to be prepared for whatever may come next. The good news is that we’ll get through this.
It’s difficult to say if a recession will be announced in 2023, but all signs point toward a rough year financially in the world. This is the best time to get serious about your money management.