It’s that dreaded “R” word. Recessions are hardly fun but sadly, inevitable.
I recently attended a luncheon where some of the smartest economists and investment strategists presented statistics and their thoughts on the global economy to a room full of investment professionals.
All of them believed a recession was coming soon and all of them were sounding the alarm bells. “When it hits, it will be very ugly,” a few said.
The thing is no one can predict the timing of a recession or what’s going to trigger it. There are so many variables that could cause it, and almost all of them are outside our control.
But what we can control is how we prepare for one. Each of us can and should take steps to recession-proof our finances to ride out the storm.
Want to know how? Here are a few steps you can take.
Build Your Emergency Fund
When a recession hits, jobs will be cut, working hours will be slashed, and many businesses will struggle.
An emergency fund is where you sock away money to help you get through unexpected day-to-day financial obligations, and it’s in my mind, the most important step one can take to recession-proof themselves.
You’ll want to aim to save a minimum of three months of your household income and keep it “locked away” in your savings account. Now, if you’re running a business that’s dependent on consumer discretionary spending (in other words, the first thing people will cut if they’re hurting for cash), or if you’re in a job that is vulnerable to a downturn and you may not be easily re-employable, seriously consider saving for six months.
If you’re thinking you don’t have the means to build an emergency fund, I’m here to tell you, you do. And better now than to struggle later.
Pick up extra shifts, curb the “splurge spending”, and invest more in your side-hustle. Use these things to your advantage while the economy is going strong because these will disappear when it’s not.
You’ll feel more at ease knowing there’s a safety net.
Pay Down Your (High-Interest) Debt
When you borrow money to fund your lifestyle and needs, the truth is you’re liable to someone and obligated to pay them regular installments plus interest no matter what.
A recession will no doubt bring stress. But you’ll feel doubly stressed knowing you owe someone money. You’ll be very fortunate if someone sympathizes with you if you’re out of work or having a tough time making ends meet. Because the reality is that they’ll want their money, and more so if they’re struggling.
So get serious about paying down your debt – especially the high-interest credit card debt that will place an extra burden on your cash flow.
Also, beware of those line of credits, loans or margin calls that can be recalled without notice. It would be a good time to review your loan contracts
Make That List of “Niceties to Cut”
It’s a good time to go through all the “nice to haves” but non-essential items that you can cut when the signs of a recession start to show.
Netflix, Crave, and all the extra Tv subscriptions can add up. Perhaps you only need one. Find cheaper options for your utilities and the internet. Hit pause on the subscriptions. Place that gym membership on hold. Replace the shopping mall visits with an outdoor activity. Eat out less. The list is endless.
Review Your Investment Portfolio
Take time to review your portfolio with your advisor or on your own to check how vulnerable your investments are to a downturn. It’s safe to assume the markets will fall and drag the value of your portfolio with it, but remember that when it happens, it would be a “paper loss” and not actually realized unless you physically sell in a panic.
There are sectors that are much more defensive in a downturn than others, while others are much more vulnerable. Take the opportunity to rebalance your holdings and ensure you’re diversified across different industries and geographies. It could be a good time to keep some cash on the side and then swoop in to buy your favourite stocks or funds that will no doubt, be on sale.
And then ride it out. If you are a few years from retirement and don’t need to access your investments for cash, you can afford to be very patient and wait for the markets to bounce back.