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9 Steps to Brace Your Finances for the Recession Ahead

Lucy Lazarony

If you’ve ever wished you could live in exciting times, your wish came true this week.

As the coronavirus COVID-19 continued spreading globally, the U.S. stock market plunged, erasing trillions of dollars in wealth and possibly ending the longest bull market in history.

That market is now in better shape than on Monday, but it’s hardly stable as the number of COVID-19 cases continues to climb. More than a few experts speculate a recession may be around the corner.

Whatever comes next, don’t let events panic you into making emotional decisions about your investments. Still, it is wise to ready your finances for the next recession, whenever that might be. Here is how to get started today.

1. 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 YNAB (which stands for You Need A Budget) can help make such tasks manageable.

2. Lower your dependency rate

How much of your regular income goes out as fast as it comes in?

Carmel, Indiana-based financial adviser Peter Dunn urges you to reduce what he calls your “dependency rate,” how dependent you are on your regular income.

Dunn says that if you spend 95% of your income on a regular basis, your dependency rate is 95%, meaning that 95 cents of every dollar coming into your household is vitally important to your solvency — or so you think.

In his column in the Indianapolis Star, Dunn writes:

“Your goal is to decrease your rate over time, even in the face of pay increases.”

Again, software can help with this. YNAB, for example, automatically creates reports that detail how much money you earn and spend each month.

3. Pay down debt

It is time to revisit those little plastic cards. Make a plan right now for paying down your high-interest credit card debt. Reducing credit card debt will do wonders for your budget, freeing up cash you may need soon.

Seize the moment to pay down loans, too, if you can.

For help getting started, check out “8 Surefire Ways to Get Rid of Debt ASAP.”

4. Beef up an emergency fund

Another way to prepare is to bolster your emergency savings. In good times, aim to save enough to cover your living expenses for at least three to six months. Now, though, with the chance of recession looming, your goal should be six to 12 months’ worth.

Haven’t created an emergency fund? Start now. A small fund that’s growing is better than none at all. For pointers, check out “9 Ways to Build an Emergency Fund From Scratch.”

5. Decide where to stash cash

Where to stash your emergency cash? If you leave it in your checking account, it will be insured and liquid but it won’t generate any interest.

So, look into savings accounts and consider certificates of deposit (CDs).

Online banks can be a good bet for both, as they tend to have lower operating expenses than brick-and-mortar banks and so may pay higher interest rates.

CIT Bank, for example, is currently paying up to 1.75% on savings accounts. And you’ll find online banks now paying as much as around 2% on CDs.

Money Talks News founder Stacy Johnson says of CDs in “How to Protect Your Savings From the Coronavirus“:

“Should you lock up all your savings? Absolutely not. The coronavirus scare may be over before you finish reading this, growth could resume and savings rates could head higher.

But a little hedging, along with a pinch of diversification, never hurt anybody. So take a minute and compare CD interest rates.”

6. Add new streams of income

Even if your job is stable, additional income enables you to pay down debts faster and build savings faster, and it adds a safety net in case your day job is endangered.

Options can range from traditional part-time jobs to entrepreneurial side jobs. Online gigs are especially good right now if you want to avoid unnecessary exposure to the public.

For ideas and inspiration, see “107 Easy Ways to Make Extra Cash.”

7. Consider a home equity line of credit

Homeowners have a cushion of cash in their home equity.

Unless you sell the home, drawing on your equity is not free. But it’s there if you find yourself in a true emergency.

A home equity line of credit (HELOC) is not, however, a safe strategy for skipping the safer planner measures we’ve already outlined. There are arguments against and for HELOCs. Much depends on your situation:

  • Worst case: HELOCs can be risky. Don’t get one, for example, if you tend to spend more when you know you have plenty of credit on tap. Also, these loans can be expensive, both to obtain (fees) and to repay (high interest rates).
  • Best case: Do consider a HELOC if you like the idea of having a last-ditch source of emergency funds and you have a safe, realistic plan for repaying the debt.

To have a HELOC in place when you need it, you’ll need to apply now. One option: Money Talks News partner Figure offers home equity lines of credit.

8. Do not stop funding your retirement

Scaling back on building your retirement nest egg is a bad idea. Picture your future self needing that money. Don’t scale back if you can help it, even to free up funds to prepare for a recession.

Maybe an extra source of income or some penny-pinching can help you meet expenses without short-changing your retirement.

If you need help with your retirement planning, check out Money Talks News’ course The Only Retirement Guide You’ll Ever Need.

9. Make backups for your backups

Well-prepared people have backup plans, and then they make backups for those backup plans.

Start by picturing worst-case scenarios — not to cause worry but to build plans so you can worry less. Here are some questions to get you going:

  • What exactly will I do if I lose my job or income stream?
  • What fallbacks are in place if we must sell our home or can’t pay the rent? Which options are realistic?
  • How could it work if we moved in with our parents or our grown kids — or had them live with us?
  • Which pieces of property, vehicles and other assets could I realistically sell for cash?

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.

Jim Gold contributed to this post.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.