How to recession-proof your finances

In the wake of the COVID-19 pandemic, the stock market and economy seemed stronger than ever for a while. Then inflation started to rise. What goes up must come down, and now we are being hit by a double whammy of post-pandemic economic troubles and new geopolitical issues like the energy crisis.

If you’re concerned about an impending recession, you’re not alone. 74% of US consumers think the same, and experts share their concerns. More than two-thirds of economists expect a recession to hit the country in 2023, with some believing it could hit earlier.

“We’re in or about to be in a recession,” said Howard Dvorkin, chartered accountant, financial writer and chairman of “When the government cut domestic oil production, the next day they hiked gas prices.”

Difficult times may lie ahead and there is little we can do about the broader macroeconomic conditions that the world may face in the coming months and years. However, we can take steps to protect our own finances.

What to expect from a recession

For many, a recession means a “financial crisis” or a general sense of panic rather than a precise set of conditions. But among pundits, a recession has a precise definition. According to the National Bureau of Economic Research (NBER), a recession is “a significant decline in economic activity that is spread across the economy and lasts longer than a few months.”

Although disputed by some, this definition is still widely used and is our first clue as to how we should manage our finances during this challenging time. When a recession hits, we can expect four broad impacts:

  1. Lower economic growth
  2. unemployment
  3. Lower wages
  4. collapse in asset prices

The first lies in the definition of a recession, and it can result in companies going bust or struggling to make ends meet. As a result, rising unemployment is a natural consequence of job losses. A lower supply of jobs and a higher supply of labor (due to unemployment) lead to lower wages. And with the purchasing power of average consumers falling (due to lower wages) and businesses suffering from sluggish growth, most asset prices, including corporate stocks and real estate, are falling.

This is an oversimplification, and every recession is a little different, but we should expect something along those lines. Now that we’ve established what to prepare for, what can you do to protect yourself?

Limit unnecessary spending

You may not be able to control your wages if your employer goes broke or if you lose your job, but you can control your own spending — and often more than you realize.

The first step to cutting back is tracking what you’re actually spending your money on and identifying where you can cut back.

“There’s always 15% of the budget that can be cut,” says Dvorkin. He advises that limiting spending on big spend will have the greatest impact, but recommends starting small, e.g. B. by reducing spending on things like lunch or coffee.

Another place to investigate is subscriptions. Between streaming, news, and deliveries, it can be surprising how much multiple commitments add up from $5 to $15 a month, as Million Stories media discussed in a recent TikTok.

Then use your results to create a budget. Personal finance expert Erin Lowry recommends what’s called a “necessities budget,” which cuts out all the nonessentials so you can figure out how much you really need to make ends meet each month. You can then refine it later to be less strict.

If all of this sounds too time-consuming or difficult to understand, there are many apps that can help. Some automatically sync to your bank account so you can track your spending, while others track whether you’re staying on budget or even automate your savings.

Build an emergency fund

As you start spending less, you can use what you save to build a safety net.

“Cash is king,” says Dvorkin. “People need cash for emergencies. Try to save three months on living expenses to start with, ideally six months, but that’s difficult for most people.”

Some experts recommend saving more when your income fluctuates, e.g. B. if you are self-employed. You may find that the number you would need to save to cover several months’ living expenses is so high that it’s demotivating, so starting with a lower goal can help. Even $1,000 is better than $0.

Once you’ve built your emergency fund, you’ll have a pot of money to fall back on when you need it. For example, you could use your emergency fund to pay for living expenses if you lose your job, unforeseen medical expenses, or a backup water heater if yours breaks.

Because asset prices tend to be volatile during a recession, it’s best to put the money in a liquid savings account. Investing and assets like real estate are not true emergency funds.

Approach investments with caution

If you have a healthy contingency fund to back you up in case things get tough, you’re at a point where you can start thinking about investing (if you want to). However, if you’d rather not take risks with your money, or plan to spend money on a major purchase (like a new house or car) in five years or less, it may be best to stay away.

Assets fluctuate in value during the best of times, and with asset prices typically falling during a recession and many companies going bust, it’s a particularly risky time to invest. It’s not for the faint of heart. If you’re looking to invest, it’s best to first speak to a financial advisor who can advise you on how to make diversified investments in accounts such as a 401(k) or IRA.

Also, many people are opting for lower-risk investments like government bonds. They might not have the most impressive returns, but they’re also historically less likely to crash and burn.

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Historically, gold has earned a reputation as a “safe haven” as its price tends to rise when others fall. However, there is no guarantee that this pattern will continue in the future.

Overall, the best way to “recession-proof” your finances is by doing what you can control: cutting back on spending, preparing for the worst, and making sure you have plenty of cash for emergencies.


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