A key Treasury market yield curve inverted last week for the first time since 2007. The Federal Reserve lowered the federal funds rate shortly before that for the first time since 2008. And a seemingly growing number of experts have predicted that the next recession is around the corner.
You shouldn’t let such events panic you, lest you make emotion-driven decisions about your investments. But you would be wise to make sure your finances are as ready as can be for the next recession, whenever it might arrive.
There are steps you can take to batten down your finances and prepare. And once your finances are secure, you’ll want to build up your resources as well.
Here are several ways to fortify your finances in preparation for a recession:
Review your expenses
This is the time to take a close look at your spending. Where is your money going each month? Go item by item through your budget.
“Figure out what is a need and what is a want (and) reduce wants,” advises Chris Chen, a certified financial planner at Insight Financial Strategists in Waltham, Massachusetts.
Cutting back on wants can help to free up cash for emergency savings that may be needed during a recession.
If you aren’t budgeting, or aren’t at least tracking your spending so that you can comb through it to determine where you should cut back, now is a good time to start. A software program like Money Talks News partner You Need A Budget (YNAB) can help make such tasks manageable.
Pay down debt
It is time to revisit those little plastic cards. Take a look at the bills, and make a plan for paying down your high-interest credit card debt.
Paying down credit card debt will do wonders for your budget, freeing up cash that you may need when a recession goes into full swing.
When experts start anticipating a recession is a good time to pay down loans, too. So, take the initiative and pay ahead on auto and other loans.
Beef up an emergency fund
It is time to bolster your emergency savings. Aim to set aside enough money to cover your living expenses for at least three to six months, and even more in a recession.
“The rule of thumb is three to six months, but if you are concerned about recession, six to 12 months is ideal,” says Lindsay Martinez, a certified financial planner at Xennial Planning in Oceanside, California.
Don’t have an emergency fund? Now is the time to build one. Even a small fund is better than none. To get started, check out “9 Ways to Build an Emergency Fund When Money’s Tight.”
Where should you stash your emergency cash? Check out online banks. They tend to have lower operating expenses than banks that maintain branches and thus tend to pay higher interest rates.
In fact, even after the Federal Reserve’s recent rate drop, there are still numerous online banks offering more than 2%. CIT Bank’s Savings Builder Account, for example, pays up to 2.3%.
Seek out extra streams of income
Don’t limit yourself to just one source of income.
“Establish multiple streams of income. If you think you might get laid off, finding ways of freelancing or even finding a new job in advance of that could help substantially,” advises Dan Tobias, a certified financial planner at Passport Wealth Management in Cornelius, North Carolina.
Even if your job is stable, bringing in additional income will enable you to pay down debts and build up savings faster.
These days, there are more options than ever for bringing in extra income, ranging from the traditional part-time job to entrepreneurial side gigs. To get a quick sense of the array of options, check out “107 Easy Ways to Make Extra Cash.”
Don’t skip out on retirement savings
Keep on contributing to your retirement accounts.
“Stay the course,” says Richard “Skip” Fleming, a certified financial planner at Lodestar Financial Planning in Colorado Springs, Colorado. “Keep contributing to your employer-sponsored retirement plans and IRAs.”
Scaling back your efforts to build a nest egg is not the way to free up funds to help you prepare for a recession. Again, seeking out extra sources of income can help you meet your short-term financial goals without short-changing your long-term goals.
How do you deal with your finances when you’re worried about a recession? Share with us by commenting below or on our Facebook page.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.