7 Ways to Bulletproof Your Finances Before the Next Recession
2023 could lead to an economic recession. Here are some ways you can prepare your finances to weather the storm.
On the heels of record-breaking inflation and rising interest rates, economists predict a recession will hit the U.S. in 2023. Higher prices for goods and services, along with a possible loss in income due to unemployment, could leave a gaping hole in the middle of your finances. But households that shield their finances now will be in a better position to face the inevitable downturn. Even if the recession is less intense than expected, the actions you take today could help improve your overall financial health.
Here are seven ways to bulletproof your finances ahead of a 2023 recession.
1. Downsize your budget.
Revise your budget to only include essential items. Pause or cancel optional services, like grocery delivery, gym memberships, and unused online subscriptions. If you can’t do without a particular service, contact the biller about other ways to lower costs. Since companies don’t want to lose customers, some may offer to help you save money by encouraging you to:
- Sign up for paperless billing
- Switch to a different service plan
- Use an alternative form of payment
The cost savings could add up quickly.
2. Create a financial cushion.
Make sure you have money set aside to pay bills if the unexpected happens. Aim to save an amount that equals at least three months of expenses. This way, if you’re forced to take a pay cut or suffer a loss in household income, you’ll have the cash for housing, groceries, and transportation while searching for another source of income. To quickly build a financial cushion, you can:
- Work a side hustle
- Sell unwanted items
- Eliminate unnecessary expenses
Deposit the funds you reap from your efforts into a dedicated savings account, and resist the urge to use the money for other purposes.
3. Pay down debt.
Reducing debt obligations can help you save money, especially on high-interest rate accounts like credit cards. Plus, paying it down could increase the cash you have available to build a financial cushion. Eliminate debt fast by temporarily increasing your income. Speak with your employer about working overtime or consider starting a side hustle.
4. Diversify your investments.
Review your investment portfolio and determine if it might be wise to rebalance different asset classes, such as stocks and bonds. This could reduce losses during an economic downturn if one asset underperforms. Other portfolio assets are likely to remain stable or bring higher-than-average returns.
5. Monitor Your Spending
It’s essential to be mindful of your spending. Impulse buys, even with deep discounts or clearance prices, could chip away at your ability to stick to your budget. Make sure you only spend money when necessary. Cut back on luxury items, and stick to your downsized budget.
6. Re-evaluate your insurance needs.
If you lack adequate insurance coverage, you could be one accident or health emergency away from a financial disaster. The damage could be even more devastating if something occurs during a recession. Without enough coverage, you might have to pay out of pocket for an accident or other event. Review all policies, including health, home, and auto.
7. Don’t panic.
While it’s important to prepare for a recession, it’s also important not to panic. Overwhelming fear rarely inspires the action needed to get finances in order, especially amid economic uncertainty. Instead, focus on preparing one part of your finances at a time.
Since no one knows exactly when the recession will arrive or how long it will last, maintaining a solid financial foundation is recommended regardless of the health of the U.S. economy.