How To Prep Your Finances To Weather The Storm

Key takeaways

• Recessions bring many dangers, including job loss, rising prices and hefty interest rates.
• While these problems can be financially painful, there are steps you can take to reduce your liability during an economic downturn.
• If you’re able, continue contributing to your investments and take advantage of stocks that are “on sale.”

News reports indicate that a recession is likely coming. Regardless of if the National Bureau of Economic Research (NBER) officially announces a recession, tough economic times are already here in the form of mass layoffs, rising rents, interest rate hikes and high prices.

What can you do to prep your finances when all the cards seem stacked against you? Let’s dive into some actionable steps you can take today to help your financial situation during tough times.

Dangers That Recession Presents to Your Finances

Before we discuss the solutions, we must understand the problems that recessions cause. Several dangers are inherent to a recession and threaten your financial stability.

While this isn’t an exhaustive list of everything that can go wrong for you in a recession, these are some of the most common concerns.

Job Loss

One of the leading indicators of a recession is unemployment. Economists have hesitated to formally declare a recession because of the low unemployment rates.

Although unemployment has remained low, specific sectors are more stable than others regarding job security. In recent data released by the Bureau of Labor Statistics, professional/ business services and leisure/hospitality jobs have sustained heavy losses. Other sectors, like government, education and real estate leasing, have remained strong.

If we examine consumer spending and economic trends, it’s easy to see why specific sectors are experiencing more layoffs. Many tech companies hired too many employees during the pandemic and are seeing their stock values plummet, so they’re cutting jobs. Plus, people fear what inflation and uncertainty will do to their budgets, so they’re spending less on travel.

However, consumers still need to send their children to school and rent a home during a recession, so the real estate rental and educational sectors remain relatively unscathed.

Inability to Get or Afford a Mortgage

The Fed has increased interest rates to combat inflation, which has been effective so far. While the year-over-year inflation as of November 2022 is at 7.1%, the Consumer Price Index (an indicator of price inflation, also known as the CPI) only increased by 0.1% in November.

The unfortunate side effect is that this increases mortgage rates. This prices many would-be homebuyers out of the market. Those with sufficient income to qualify for a lower payment no longer do once the higher interest rate is factored into the cost.

Additionally, many folks are wary of committing to a mortgage during a recession since they could lose their job or be forced to spend more on daily necessities as prices rise.

Price Increases

Most Americans are feeling the squeeze of higher prices whenever they check out at the grocery store or the gas pump. CPI data shows that the cost of energy and food have been the source of most of the price increases. Food has increased by 10.6% and energy by 13.1%.

Unfortunately, food and energy are purchases people can’t eliminate from their budgets.

Portfolio Losses

2022 was rough on Americans’ budgets, but it was just as punishing on their retirement savings. The average 401k balance dropped from $126,100 to $97,200, a 22.9% decline.

Watching your hard-earned money in a retirement account drop is nauseating, even when you’re working and still have time to recover your losses. However, it can devastate those who rely on their retirement savings for income.

In a survey of retirees in 2022, 13% reported that an IRA was a significant source of their income, and 33% said it was a minor source. Work-sponsored retirement plans (such as a 401k) were a major source for 12% of retirees and a minor source for 24%.

While Social Security and pensions represent the most significant income sources, for those on a fixed income, having to sell shares to pay for daily needs while they are dropping is a tough pill to swallow.

How to Prep Your Finances to Weather a Recession

While many headlines are forecasting doom and gloom for 2023, the good news is that there are ways you can survive a recession.

Boost Your Skill Set

If you’re worried about the stability of your job, wringing your hands isn’t going to help. Instead, work on becoming indispensable to your company.

Broaden or deepen the skills you offer. Think out of the box on ways to save your organization money or make more of it.

Michael Gibbs, CEO of Go Cloud Careers, suggests transitioning to a sales role for maximum job stability. He states, “Those who are in positions that help to increase the company’s overall revenue are those who are most likely to stay safely employed in a down economy.”

Work Your Network

If you start hearing rumors of layoffs at work or are nervous about your job stability, reach out to your network early. For maximum success, start networking before you need to. Brush up your dusty LinkedIn profile, reconnect with old contacts and ping forgotten friends on social media.

Ironically, networking is most effective when you offer genuine help to others. Forget your personal agenda and instead ask yourself how you can help others. Once you do someone else a favor or make an introduction, the other person will naturally want to reciprocate.

In addition, remember to follow up and thank them for any assistance, advice or connections you receive.

Pay Down High-Interest Debt

With rising interest rates, debt balances with variable rates (such as credit cards) can go from bad to worse. Make it a priority to pay off the debts with high rates as quickly as possible. At a minimum, you should avoid adding anything to your debt balance that has a high interest rate.

Paying extra on your debt when prices rise may seem difficult, but your efforts will compound since your reduced payments will free up money for other purchases. It might be helpful to temporarily pick up a side hustle or sell some personal items to pay down your debt.

Beef Up Savings

Emergency savings accounts were designed for disasters brought on by recessions, such as sudden job loss. Even if your income is safe, it’s worthwhile to add to your savings if you can afford it.

Saving for a rainy day can be challenging. Only 37% of Americans have more than one month’s expenses saved. The average job search is around five months, so running out of money in the event of a layoff is a considerable risk.

Luckily, by adding a small amount to your savings account each month, you can mitigate that risk and give yourself the time to wait for a job that’s a good fit rather than accepting the first one that comes along.

Trim Unnecessary Spending

Cutting the fat from your budget is the quickest way to free up money for necessities, savings or debt reduction. The best way to do this is by tracking your spending.

Use a spreadsheet or an app to track your daily spending so that you know where your money is going. Then, you can decide what can be redirected to your debt or savings.

While this might sound painful, cutting your spending doesn’t have to mean eliminating all pleasures. Some of the most effective ways to save are to check for money leaking away in the form of subscriptions you don’t use or shop around for insurance and cell phone providers.

With these strategies, you can reduce your spending and keep your avocado toast.

Keep Calm and Carry On

The NBER doesn’t issue a red “Don’t Panic” button with the declaration of a recession, but they probably should. The reality is that most people won’t lose their jobs, portfolios will likely recover and a recession won’t last forever.

If you are already making sound financial choices, stay the course, especially with your investments. In the words of Warren Buffett, “Be fearful when others are greedy and greedy when others are fearful.”

Stocks of all shapes and sizes are on sale. During a recession, sticking to an investment plan of dollar-cost averaging will be your best friend in the long term.

The bottom line

If you’re lucky enough to be able to invest during a recession, put your money where you can best protect it with Q.ai’s Investment Kits. You can turn on Portfolio Protection at any time to reduce your losses.

You also don’t have to scour the headlines to see where each industry is headed. Powered by artificial intelligence (AI) technology, Q.ai does this work for you. It bundles investments from various sectors so you can automatically put your money in a diversified group of assets.

Download Q.ai today for access to AI-powered investment strategies.