Secure your finances in a potential recession of 2023 by creating an emergency fund, reducing debt, diversifying investments and seeking professional advice. Learn the 6 action steps to recession-proof yourself.
2022 was a tough year financially for many people. We saw.
- Rising interest rates
- Purchasing power falling
- Inflation hitting highs not seen in decades
- A recession getting dangerously close (if it’s not here already)
Yes, the “R word.” Recession.
Opinions differ on if we’re already in one or on the verge of one.
Government economists say “No” because we haven’t experienced two consecutive quarters of negative economic growth as measured by the Gross Domestic Product (GDP).
Some private-sector economists disagree, saying that when purchasing power is declining and interest rates are rising, we are indeed in a recession.
No matter which school of thought you subscribe to, if you’re not already “recession-proofing” yourself, you’re setting yourself up for a financial catastrophe.
That’s the bad news.
The good news is…it’s not too late to take action to fight back against financial pressure today and recession-proof yourself for 2023 in the process.
Where to start
Getting your financial house in order is like eating an elephant. There’s plenty to chew on, but where do you start?
A good way to determine your starting point is to answer this question: “What’s keeping you up at night?”
- Constant calls from creditors looking for late payments
- A nagging feeling that one financial setback (i.e., transmission or refrigerator conking out) will wipe out your bank account
- Being downsized and unable to find a new job
- A combination of the above
- Other financial concerns (retirement, college funding, losing your job, etc.)
Worries like this, and others, are only made worse during a recession.
Assuming we’re on the verge of a recession, what concrete steps can you take starting today to prepare for a serious recession in 2023?
6 steps you can take today to become recession-proof
1. Focus on building an emergency fund.
Or, in other words, stop spending so much and start socking money away.
There are only two ways to build an emergency fund:
Earn more and put the extra into your fund Spend less
No, it’s not going to be easy. It’s going to require some lifestyle changes for a while:
- Eating out less
- Cooking more (not having food delivered)
- Using coupons
- Cutting back on cable or premium channels
- Bringing lunch to work
- Eliminating Starbucks and fast food stops
These are just a few of the ways you can find money to put into your emergency fund.
2. Prioritize paying off your high-interest credit cards and loans.
You know you’re getting creamed when you’re making the minimum payment every month and your balance keeps growing.
The only way to stop this cycle is to pay your debts off, and we’re not talking about your mortgage.
Concentrate on making more than the minimum payment on your debt or credit card with the highest interest rate and paying it off ASAP.
Once you’ve done that, “snowball” that payment into the next debt with the highest rate. Keep doing this until all of your credit cards and short-term debt are paid off.
And while you’re doing this…cut those credit cards up. Use a bank debit card instead. It will help stop your cycle of adding debt and raising your stress level.
3. Get the most out of your employer’s 401(k) match.
If you have a 401(k) or other retirement plan at work that your employer is making matching contributions to, have at least that much taken out of your check to double your savings rate and have more money put away in case of a recession.
For example, if you earn $4,000 per month and your employer matches the first 3% of your income that you put into the company retirement plan each month, be sure you contribute at least 3% per month. You’ll be putting in $120 and your boss will be matching that dollar-for-dollar.
It may not seem like much now, but at least it’s a start, and you can slowly increase the percentage over time. You’ll be pleasantly surprised how quickly it adds up.
4. Invest your money conservatively.
Unless you’re flush with cash, pre-recession is not the time to be throwing caution to the wind when it comes to investing.
Crypto and other speculative investments may be of interest to you, but is now the time to take unnecessary risk?
Consider investing in value stocks that pay dividends. Companies that provide consumer goods are usually safe choices since people will continue to buy food and personal items (toilet paper, detergent, cleaning supplies, etc.) during a recession.
Also, consider precious metals like gold that have historically risen in value during inflationary periods.
5. Pay yourself first.
No action item we’ve discussed so far is going to happen unless you make yourself and your family your number one priority and pay yourself first.
People who have a percentage of their paycheck deducted before they ever see it and have it automatically deposited into their emergency fund and retirement account are more financially secure than those that don’t. It’s a fact. And they sleep better at night.
People who pay everyone else first and plan on saving what’s left find out there’s “too much month left a the end of the money” and end up saving nothing.
6. Understand your student loan options.
If you’re one of the millions of Americans saddled with student loans, you need to know what steps you can take if a recession hits and you can’t make your payment.
While federal student loans remain automatically suspended until sometime in 2023, private student loans don’t.
If you’re unable to make your monthly payment because of a job-loss or income reduction in 2023, consider these options:
- Request a short-term pause on payments without interest continuing to accrue (longshot).
- Ask if you qualify for deferment and have your loan deferred for up to 36 months (interest will accrue).
- Get on a new repayment plan capping your payment between 10% and 20% of your discretionary income and forgiving your balance after 20 to 25 years of payments.
A final thought
Recessions aren’t predictable, but they are inevitable. And they’re beyond your control.
You can’t control what happens to the national economy, but you can control your own economy and recession-proof yourself. It will take time and self-discipline, but you can do it.
The key – start now.
Open up that emergency fund today and set up automatic deposits every time you get paid. Raise the percentage your contributing to your retirement plan – today.
Don’t regret not taking action if and when a recession hits.
As one wise sage said, “Self-discipline weighs ounces, while regret weighs tons.”