What You Should Do Now to Prepare for a Recession

What You Should Do Now to Prepare for a Recession
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Not to be too alarmist, but the economy isn’t looking super great at the moment. From crashing stock markets to spiking consumer prices, a recession seems to be looming. Although the news is troubling, there are steps you can take to stave off panic and protect yourself as best as possible during a downturn.

I spoke with personal finance expert Jen Smith, co-host of @frugalfriendspodcast and modernfrugality on Instagram, who shared her top tips for what you can do now to prepare yourself for whatever economic conditions are around the corner.

Start by looking at your spending habits

Smith says to examine at least the last 90 days of your spending to see where exactly your money is going. When it comes to the idea of “cutting back,” many people panic and assume their way of life will have to radically change. Smith says this is a fear response and often isn’t the case. “The first thing you think you need to cut,” like your daily coffee or your weekly happy hour, “can usually be the last thing to go.” Smith shares that after looking over their spending habits, most people discover they can first cut back on areas they don’t even realise they’re wasting their money (overlooked subscriptions come to mind).

During a recession, your means of increasing your income — raises, promotions, and side hustles — will be limited. So while it feels more ideal to start bringing in more money, Smith says that to get through temporary hard times, “focusing on cutting back is more important than increasing your income.”

Tackle high-interest debt first

Smith lays out two main approaches to tackling debt: the debt snowball, and the debt avalanche. The snowball method targets your smallest debt first, no matter the interest rate, while the avalanche prioritises debts with the highest interest rates. Smith advises you to prepare for a looming recession via a debt avalanche.

As mentioned above, your income is not as secure during a recession. Compared to the gradual debt snowball, the avalanche method is your go-to during recession-induced survival mode.

To use the debt avalanche strategy, Nerd Wallet recommends adding up all the minimums you must pay on your debt (excluding your mortgage). Order them from highest interest rates to lowest; Smith says that any interest rates over 5-7% should be your priority. Then, make a budget to determine the maximum amount you can afford to put toward paying off your debt each month.

Start building a rainy day fund

It’s never too early to start contributing to a “rainy day,” which during a recession might be more accurately rebranded as an “emergency fund.”

You want to establish a “starter” emergency fund, but as those reserves grow, Smith says that it’s likely a higher priority to tackle your high interest debt first. A potential guideline for what counts as a “starter” rainy day fund is around one month of rent plus your insurance deductible. After you hit that amount, refocus on paying off high interest debt. Then you can resume building an emergency fund that can cover you for six months or longer.

Listen to your fears, but don’t live in them

Recessions make everything uncertain. Still, it’s in your best interest to keep a cool head. “When we live in fear, we make worse financial decisions,” Smith says. While it’s important to take the above precautions, it’s unwise to let fear control your life.

You can find Jen Smith on Instagram and listen to The Frugal Friends Podcast anywhere you listen to podcasts.

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