Dec 12, 2023
Whether a recession seems imminent or not, it may be helpful to understand what a recession is and know how you could keep your personal finances in order so you can weather a storm.
Taking steps to protect your finances and job prospects may help you be more prepared for a potential downturn and feel more in control. And you could be better positioned financially no matter what the future holds.
Those steps might include checking your budget more often, adding to your emergency fund, and paying off higher-interest debt (or consolidating it with a lower-interest loan). And if your job could be at risk, you might want to step up your networking efforts and build your skills.
You may also consider consulting a financial planner. But first, learn what you can do on your own.
Here are four strategies to help you prepare for a recession (or just fast-track your financial goals).
1. Understand what a recession is and what it means for you
2. Review your personal finances
3. Trim your spending and pay off debt
4. Take stock of your job security and stay on your toes
An economic recession may not always be easy to define. Technically, a recession means there is a marked slowdown in business activity across the economy that lasts more than a few months.1 But other economists think of a recession as reduced growth for six months or more.2
For most consumers, the official definition is less important than how a recession could affect them personally.
When businesses cut back production because of lower demand for their products, for example, layoffs might follow.3 And when layoffs lead to cuts in household income, consumers often look to be careful about their spending. Then demand for products goes down even more.
The current economic situation is a bit more complex. High inflation has led the Federal Reserve to hike interest rates in an effort to slow the economy and bring prices down. Higher interest rates increase the cost of borrowing, which may reduce the demand for things like homes or cars that many people can’t buy with cash.
That’s why many experts think the economy could still slow enough to slide into recession.4 And this possibility may lead consumers to worry about the potential of lost income as well as paying bills.
Of course, anytime is a good time to take a close look at your finances. And if you’re concerned about a possible slowdown, doing it now may help you feel better.
Many people find that talking to a financial professional can help relieve some of their stress. Recession or not, a certified financial planner can help you set goals and track your progress. For example, if you don’t know how you will cope if you lose your job, they might be able to help you come up with a plan.
If you already work with a financial planner, you could set up a call to explore “what ifs?” Playing out a few scenarios may show you how long you can get by on your emergency savings. And it could help you get ready to act fast and adjust spending if you need to.
Even if you check your money picture regularly, it’s still a good idea to plan what you might do if your income takes a hit.
Your budget won’t work if you expect to “set it and forget it.” If you’re concerned about a recession, take another look at your budget and think about ways to cut your spending.
You might even be able to cut back on living expenses. For example, if you’re part of a two-income household, see if you could get by on only one of those incomes.
Then add some of that money to your emergency fund. And hold off on big purchases (if you can) so you will have cash in the bank if your situation changes.
Because interest rates are on the rise, it could make sense to consider paying down variable-rate debt. One way to do that is by consolidating it into a loan with a lower fixed rate.
Just be sure to look for a lender that doesn’t charge prepayment penalties, like Discover® Personal Loans. This could help you save on interest in two ways: by potentially paying a lower rate overall, and by paying the loan off early without any penalty if things improve.
If you work in a job or industry that could be hurt by a recession, keep your ears to the ground about cutbacks. Start networking so you can stay in the know about changes in the marketplace and get ready to make a switch if necessary.
You could also look for a second job or side hustle. The extra income might help bridge the gap if you are laid off from your job.
It’s normal to worry about a recession. But it may help to remember that recessions are a part of every economic cycle. And it isn’t always severe or long-lasting.
Whatever happens, you can take steps now to trim spending, add to your emergency fund, and pay down debt. And you can always ask a financial professional if you’d like more specific advice. If a slowdown does come, you will be relieved to know that you could weather the storm.
Learn how debt consolidation might help improve your financial picture, now and in the future.
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