How to Make Your Savings Recession-Proof

 

With rising interest rates and record food and energy prices, a recession in 2023 may be difficult to avert. Preparing for the realities of such a downturn, which may include fewer job possibilities as the economy tightens, continued layoffs, and continued stock market volatility, is a vital step toward weathering whatever hardships lie ahead.

In 2023, the Federal Reserve intends to battle inflation by hiking interest rates. With the economy running hotter than expected, it may take longer to control inflation than anticipated at the start of the year. The more the Fed raises interest rates, the slower the economy may become; therefore, investors want to know how to plan for a recession. 

Ordinary people can adopt numerous everyday actions to protect themselves from the pain of a recession or eliminate its effects. When the recession hits, these methods can help you get through it financially intact.

For the National Bureau of Economic Research, recessions, or times of economic decline, typically endure 10 to 17 months and can cause significant uncertainty. However, navigating such economic turbulence can be far easier if you’ve laid the groundwork. 

Recession-proofing your investments is devising a plan to weather a potential loss of income while maximizing your return if you are fortunate enough to keep your resources untouched during the recession.

During difficult times, your financial plan’s strength may be tested in unexpected ways. And this can elicit strong emotions, which can sometimes complicate financial decisions. If you want to understand how to be better prepare for a recession, here are some tips to help you manage and strengthen your finances.

Step 1: Establish an Emergency Fund

If you don’t already have one, making one should be your first priority. It’s a good idea to have some money set up for emergencies. This might assist you in weathering unforeseen expenses such as job loss or unexpected medical bills. Save enough  to cover between three to six months of living expenses.

Furthermore, if you have your own money, you will be less reliant on borrowing to cover unexpected expenses or job loss. When a recession occurs, credit availability tends to dry up rapidly. When these situations happen, use your emergency fund to meet critical expenses, but keep your budget strict on discretionary spending to make that emergency fund last as long as possible and restore it as soon as possible. 

Step 2: Pay off high-interest debt.

Carrying high-interest debt is never a good choice if possible. This rule of thumb becomes even more important in an economy marked by growing credit card interest rates and equally high prices for basic needs. 

Being in a situation where you’ve eliminated high-cost obligations allows you to better prepare financially for other things. The more you can save and the less debt you have, the more money you’ll have available in an emergency. 

Step 3: Have Additional Earnings

Even if you have terrific full-time work, having a secondary source of money is a good idea. With job security so low these days, having more employment means having higher job security. Diversifying your income streams is just as crucial as diversifying your investments.

When a recession occurs, even if you lose one source of income, you still have the other. You may not earn as much as you used to, but every little bit helps. As the economy improves, you may emerge from the recession with a thriving new business.

Step 4: Examine Your Investments

Many people’s retirement funds are invested in the stock and bond markets. Consider diversifying your investments, such as equities, bonds, real estate, inflation-protected Treasuries, and commodities. 

Examine stocks in the health care, utility, and consumer goods industries. Even though consumers often reduce their spending during a recession, they still require health care, energy and other utilities, and consumer products such as food.

Step 5: Make a financial strategy.

If you don’t have a financial plan, you should create one and update it as needed along the route. Planning can help you understand where you are now and provide a road map to a financially secure future. You can assess the impact of various market and economic situations on your financial well-being as part of the planning process, for example, calculating the amount you may need to save to meet your key goals if some conditions change.

Saving and investing for the future while still taking precautions to protect what you have today can be a difficult balancing act. Consider your financial picture in three key categories: emergency preparedness, protection, and development potential.

The secret to surviving a recession is to prepare for the worst-case situation. Build an emergency fund, pay off high-interest debt, live within your means, diversify your investments, invest for the long term, be honest about your risk tolerance, and monitor your credit score. When a recession hits, it’s a good idea to search for a side job to keep money coming in.