Strategic Financial Moves to Prepare for a Recession

A recession often denotes a considerable slowdown in trade and industrial activity. It triggers a rise in unemployment, a decline in home prices, a decline in investment value and economic activity, a decline in the stock market, and a rise in interest rates. All of which have a negative effect on your ability to accumulate wealth.

According to economic research, the Federal Reserve appears to be aiming to hike interest rates more quickly than it has in more than a decade, and investors are quite concerned that 2022–2023 will mark the start of the second great depression. Inflation is already climbing to a 40-year high.

However, if you are adequately prepared for the worst-case scenario, you can make plans to lessen the impact of a recession on your money.

Proactive Financial Planning for an Impending Recession: How to Prepare Your Finances

Being prepared and adhering to the Boy Scout rules are smart actions before a recession!

Recessions may undoubtedly have a major negative impact on your stock and real estate holdings, but if you take proactive steps to prepare for one, you may be able to benefit from it.

1. Minimizing Damage to Your Personal Finances – Because of changing interest rates and insecure job security, a recession won’t just hurt the economy; it’s also likely to have a significant impact on your personal finances. For this reason, we advise doing the following to prevent future interest rate changes from thwarting your financial objectives. So, here’s how you may create a financial backup plan to aid in being ready for a recession that financial experts have forecast.

• Creating a Budget for Building Your Wealth– The greatest approach to increasing your wealth is to live within your means, even when the economy is doing well. And to avoid taking on more debt, you must ensure that monthly costs like rent or mortgage payments, auto payments, and discretionary spending stay within your budget. This way, you may put money into your savings accounts rather than use it to pay off existing debt. You should thus pay close attention to sticking to your budget if there is an economic slump to prepare for a recession. You need to start by being deliberate with your spending if you’re serious about building a financial future that enables you to increase your retirement account or establish generational wealth.

• Keep Your Good Credit – Before carefully preparing your recession strategy, put off putting a down payment on expensive products, a new auto payment, or even any additional payments on low-interest bills. Keep an eye on your credit score while you purposefully avoid taking on new debt, settle high-interest debt, and build up your savings. It would be wise to address any issues with the credit bureaus right away so that your stellar reputation would serve you well in the future. Keep in mind that credit should only be utilized sparingly. Take deliberate steps to build your credit today to ensure that it will be there to help you in the future if you find yourself in a situation where you require a credit line.Pull your credit report to start, not just to check your score but also to verify the listed creditors, balances, and activities. Good credit is normally created on purpose over an extended period of time. It doesn’t suddenly appear. Your wise financial choices should enable you to increase the difference between your income and costs so that you may make investments that will enable you to reach your investment objectives and save money for the future.

• Create an Emergency Fund – Your emergency fund needs to be your first priority if you want to make sure your finances are recession-proof. Your safety net can save you in an emergency;

a. lessen your unneeded stress

b. assist you in preventing financial overspending

c. make sure you don’t need to borrow money to survive.

The first step in mitigating the possibility of unemployment is setting away 3 to 6 months’ worth of basic living costs. After that, you may carry on by gradually increasing your emergency fund until it equals one year’s worth of minimal living expenditures.

Remember to factor in everything you require to get by in your usual everyday life when figuring up your basic costs, including groceries, housing, utilities, and transportation. Create your emergency fund in a separate savings account so you won’t be tempted to use it for other things.

Where Should Your Emergency Fund Be Placed?

The next step is to decide where to store your funds. In reaction to the Fed’s aggressive rate rises, banks are currently rapidly increasing savings rates, which might make it a tempting alternative. However, it’s crucial to avoid sacrificing liquidity for yield.

You don’t want to lock your money up too securely during a severe recession; instead, make sure that it is still available in case you lose your job and need to utilize it to pay bills.

If you don’t start saving for emergencies while your finances are still in good shape, you could find yourself having to choose between taking money out of your retirement account or asking for a home equity line of credit (HELOC).

Investment Diversification in a Recession

Having a diverse investing portfolio is essential when times are rough. Making sure that your investments are widely distributed and that your wealth isn’t all concentrated in one location is therefore among the most crucial things to undertake in advance of an economic downturn. To prevent a decline in prices in one section of your portfolio from having a negative influence on the value of the whole, spread your assets over a variety of sectors and holdings.  Look for long-term investments that are steady and have the least amount of volatility. Many investors already have real estate, separate brokerage accounts, business investments, company 401Ks, and so on. We’ve discovered that commercial real estate syndications, such as hotels and multifamily apartment buildings, offer the most reliable, recession-proof solutions.

Reduce High-Interest  Rate Debt

The last thing you need as a probable recession approaches is a mountain of high-interest debt to pay off. You may be able to save money on interest payments if you can pay off whatever debt you presently have. The excess money can then be used to increase your emergency fund. To be sure there are no unpleasant surprises when it comes to paying off those obligations, request a copy of your credit report. For instance, if you have high-interest debt, the cost of your interest payments may be more than the return on your investment, thus we always advise paying off any credit card debt BEFORE you make any future investments.

Keep Close Watch on Interest Rates

For instance, it is far preferable to prioritize paying off debt with a 20% interest rate, such as a loan or credit card, rather than increasing your investment portfolio, as the long-term average rate of return on the stock market is likely to be much lower. To make sure you’re paying off more than the minimum payment due on your personal loan or credit card, create a debt repayment plan.

The moment to refinance any significant assets in order to achieve better terms, cheaper rates, or both is now, not after the recession comes. Banks typically tighten regulations during challenging economic times, making it even more difficult for customers to get back on their feet. So pay close attention to your balances and interest rates this month as you analyze your credit, loan, mortgage, and auto accounts. A quick phone call to the creditor might occasionally result in savings for you. Sometimes, though, you find that refinancing is a good option.

Final Advice

It’s not impossible to plan for a recession. It makes sense to take preemptive measures to get ready and make sure that turbulence doesn’t derail your financial goals even if there may be difficult times ahead.

It’s a big step just to be aware of your stats. assemble all of your financial records, including credit reports, credit reports, and statement copies. After that, schedule a specific “money date” to go over all of your accounts.

If making a spreadsheet or entering everything into an online tracker makes your heart sing, go ahead and do it. In any case, you may monitor your development, plan your course of action, and adjust your approach as necessary from a position of knowledge.