How to Prepare for a Recession: 5 Ways to Get Your Finances in Order
Whether we want to admit it or not, a recession is here and times may start getting even tougher than they currently are. Inflation is through the roof right now and times are tough. Groceries are out of control, gas prices are out of control, and it sucks. But, today we're going to talk about how to prepare for a recession to set yourself up for success so that when this time comes, we can handle it.
1. One-month emergency fund
Wondering what to do to prepare for a recession? The number one thing is to have one month's worth of expenses saved as an emergency fund. Then you can save up to three, then six months' worth. And I personally keep mine in a high-yield savings account.
High-yield savings account
I love CIT Bank. Their interest rates are ten times the national average, and they do fluctuate. Right now, they're actually really high. So, now is a great time to put your money into a high-yield savings account rather than just having it sit in cash.
So, one month's worth of expenses is a great place to start in terms of how to prepare financially for a recession because if an emergency happens, you want to be prepared.
2. Reevaluate your budget
The second step for how to prepare for a recession is to reevaluate your budget. If you don't have a budget, get on a budget. If you already have a budget, reevaluate it. Really look at what you're spending.
What you paid for groceries a year ago is not going to cut it now, and it sucks—inflation is through the roof. So, reevaluate what you're spending and make cuts when you can.
Cut back on different aspects of your grocery budget: rather than buying a lot of prepared foods, make some food from scratch, and shop your pantry.
Look at the types of foods that you're buying and be like, all right, can we stretch these meals? Can we add some rice or some different things to make it go a little bit farther or a little bit longer?
If you're just going with inflation and spending more on groceries and gas, but your income is staying the same, that's a really easy way to go in the red. We need to prepare for that and be aware and mindful of all the things that we're spending money on every time we're swiping our card. It adds up quickly.
3. Pick up a side hustle
Find some ways to bring in some extra money. That could also be working some overtime at your work if they offer that, but also find ways to make extra money from home.
All you need is an internet connection to make money from home. You can also do side hustles like Rover (dog-sitting) or Uber Eats (for delivery) and different things like that but there are so many side hustles that you can do inside your home as well.
It's really important to increase your income and diversify your income. We don't want to rely solely on our day job, and we don't want only to have that one stream of income. We want to have multiple streams of income so that if one tanks a little bit or one is cut out completely, we're not freaking out. We have diversified income streams.
4. Pay down debt
Pay down debt, especially high-interest debt like credit cards. We're going to see credit card interest rates go even higher in the next couple of months, and it's going to suck. So, pay down those high-interest credit cards first.
There are big debates: debt snowball, debt avalanche. I personally recommend in times like this when we are heading into recession, it's really important to do the debt avalanche. It's the best one for this specific scenario. The debt avalanche gets rid of that high-interest debt because it could increase, and you're going to be paying more in interest. So, we want to get that knocked out right away.
So, pay off debt, especially high-interest debt. We want to earn interest in our high-yield savings accounts, not pay interest on our debt!
5. Max out your retirement contributions
I've received so many messages on Instagram saying, what do I do? Do I pull my investments out of the market? It's red; it looks scary; it looks bad. I'm going to pull out my investments, Kelly. No, do not pull out your investments, especially if you're not anywhere close to retirement.
This is actually a good thing for us. Retirement is 10, 20, or 30 years away, so we can get our index funds on sale now. We can get them at a fraction of the cost of what they are typically, which is awesome.
How to prepare for a recession
The recession is coming, guys. Learn how to prepare for a recession before it happens, and you’ll be a lot better off.