Inflation. Rising interest rates. The collapse of FTX and Silicon Valley Bank. A recession’s coming. Some would argue that we’ve been in one. By definition (Two consecutive quarters of declining GDP (Gross Domestic Product)), America isn’t in one yet as the economy has grown the last two quarters. But it’s coming. I don’t know when. It could be the end of this year as some analysts predict. It could be next year.
On average since 1948, America experiences a recession every 6 years. We haven’t had one since 2007-2009 (If you don’t count the 2 month recession the US experienced in the beginning of 2020 because of the Pandemic). We’re due for one. It’s just a part of the natural economic cycle. And if you didn’t know it, recessions = bad. People cut back on expenses, the economy slows down, companies earn less in revenue, people lose their jobs, and unemployment rises. While some people go unscathed during a recession, it can be a terrible time for others. Preparing for a recession can help you mitigate its impact on your personal finances.
Create a Budget
You should have one already. But if you don’t, it’s never too late to create one, especially with a recession looming. I’m not a fan of paying for budget apps (Paying money to keep track of your money doesn’t make sense to me) or using a budget app that logs into your banking accounts and automatically pulls your transactions. Do it for free, protect your personal data, and keep it simple. I have a budget that I created using Google Sheets and I keep it in my Google Drive account so I can always access it on my phone. And actively managing your budget instead of letting an app do it for you will allow you to be conscious of your spending and prevent lifestyle creep. Check out the image below to see how I have mine set up.
Eliminate Non-essential Expenses
I’m not talking about necessities like food, housing, and healthcare. Although there are ways to cut back on those expenses, they are more difficult to do. Focus on the easy ones like subscriptions, streaming services, phone plans, home internet, gym memberships, and car insurance. Over the last couple of years, I cancelled my YouTube TV subscription ($60 monthly) in favor of Netflix, sharing Peacock with family, and buying an antenna. There are so many streaming services out there, I’m sure there’s at least one you pay for that you can cut. I went from the $20 monthly Planet Fitness membership to $10 monthly because I only worked out at one location. I was paying $120 monthly for AT&T’s unlimited data and wasn’t coming anywhere close to needing that amount of data. I switched to Verizon’s unlimited data for $84, and that includes a free subscription to Hulu, Disney+, and ESPN+! For home internet, I pay for 250 Mb speed. I live by myself so the higher speeds are just a waste of money. And every year I shop around for car insurance. Reducing unnecessary expenses can help you free up money for your next step:
Build Up Your Emergency Fund
An emergency fund is money set aside to cover unexpected expenses or loss of income. Appliances and vehicles break. Medical and insurance deductibles have to be met. Having an emergency fund can help you weather any financial storm. Experts recommend having 3-6 months worth of expenses saved up in an emergency fund. If a recession is looming, I recommend 6 months of expenses in cash kept in a high yield savings account. This can help you avoid dipping into your investments or retirement accounts in case you get laid off or if other financial emergencies arise.
Keep Your Emergency Fund in a High Yield Savings Account
I keep mine in Capital One’s 360 Performance Savings Account, which currently has an annual interest rate of 3.40%. Let’s say I have $20K kept in my emergency fund. At a 3.40% interest rate, I would receive $680 in interest yearly!! There are other banks (Mostly online banks – Ally, Citi, SoFi) that have even higher interest rates. These are variable and change over time, so it’s good to shop around every year to see who has the highest rates. Keep in mind that some banks require a minimum amount kept in the account in order to receive the high interest rate.
Build Up Your Assets
This one’s my favorite. Once any high interest debt (credit cards, personal loans) has been paid off and your emergency fund is built up, AND ONLY WHEN YOU HAVE PAID OFF YOUR HIGH INTEREST DEBT AND BUILT UP YOUR EMERGENCY FUND, should you move to this step. Start saving cash to buy stocks when the stock market inevitably crashes. In the words of Warren Buffett, “Be fearful when others are greedy, and greedy when others are fearful.” Buying stocks during a recession or bear market can be a good opportunity to purchase quality companies at discounted prices. I don’t recommend buying individual stocks anymore. Stick to buying index funds like the Vanguard Total Stock Market Index Fund (VTSAX) and dollar cost average your purchases throughout the recession or bear market – investing equal amounts of money at regular intervals.
Stay Informed
Keep an eye on economic news and trends to stay informed about the state of the economy. This can help you make informed decisions about your finances and adjust your strategy as needed.
Do NOT Look at Your Portfolio
It’s going to get ugly during a recession. Constantly looking at your portfolio and seeing losses will tempt you to start selling your investments. Remember, it’s only a loss if you sell. It’s important to stay invested and avoid making impulsive decisions. Historically, the stock market has always bounced back after a recession, so stay the course and focus on your long-term goals.
Prepare for Unemployment
Recessions and unemployment go hand in hand. During the last recession of 2007-2009, the unemployment rate peaked at 10%! It doesn’t hurt to update your resume and LinkedIn profile, begin reaching out to your professional network, make sure you have an updated list of references and reach out to colleagues or former managers who can act as references, and make yourself more valuable in the job market by obtaining certification that your field offers or taking classes or training to improve your skills:
- Udemy – An online learning platform with over 130,000 courses in a wide range of topics, including business, marketing, programming, and design.
- Coursera – Coursera partners with top universities and organizations to offer online courses in a variety of fields, including computer science, data science, business, and social sciences
- LinkedIn Learning – LinkedIn Learning offers over 16,000 courses on a variety of topics, including software development, creative skills, and business management.
- Khan Academy – Khan Academy offers free courses in subjects like math, science, and humanities.
- EdX – EdX offers online courses from top universities in subjects such as computer science, business, and engineering.
