394877 06: A woman walks past a closed store September 24, 2001 in New York City. While the economy … [+]
Recession.
For over a year, we’ve been hearing warnings that the United States was on the verge of falling into a recession.
Jamie Dimon, CEO of JPMorgan Chase
JPM
Whether we enter a recession or not is for economists to debate. Today I want to discuss the steps you can take right now to prepare for one.
If we enter a recession, you’ll be ready. If we don’t, your finances will be better off. It’s a win-win scenario. Let’s get started.
Prepare Your Finances
Preparing for a recession requires a solid financial plan. Here are some key steps to consider:
Build an Emergency Fund
In a recession, the most significant financial risk is job loss. When the economy contracts and businesses earn less, they start laying off employees.
Having an emergency fund is essential during a recession.
In normal scenarios, your emergency fund should cover at least three to six months of living expenses. If you think you have a higher-than-average chance of being laid off, you should increase how much you’re saving in your fund. Having a year or more is not a bad idea in these times.
When the fears of a recession pass, those are extra savings you can invest for your future. Put your emergency fund in a high-yield savings account so you’re earning interest.
Reduce Your Debt
Once you’ve expanded your emergency fund, work towards reducing high-interest debt. This will reduce your monthly expenses and help you weather a recession more quickly.
If you have low-interest debt, such as student loans or a mortgage, make the regular payments. Depending on when you receive the loan, these rates may be lower than what you can get from a savings account or CD.
If you can, consider consolidating higher-interest debt if you can get it down to a lower rate. It may be difficult in our rate environment, but it could be worth investigating.
Simplify Your Financial Systems
Now is an excellent time to look for complexity in your financial system and take steps to simplify them. Do you have too many bank accounts? What about credit cards? Look to consolidate them so your system is easier to understand.
The last thing you want to do in an emergency is have to navigate unnecessary complexity.
Prepare for a Potential Career Change
As we mentioned earlier, the most significant risk in a recession is losing your job. If you don’t lose your job, you risk having your hours or shifts cut or you may be asked to take a pay cut.
Regardless of what happens, here’s what you can do to prepare for a potential career change:
Improve Your Skills
It’s never a bad idea to improve your skills, whether learning new ones or developing existing ones. If you work in a field with certifications and accreditations, consider pursuing them so you’re a more valuable employee.
There may be an opportunity to improve your skills by taking courses or attending workshops focusing on developing new skills or enhancing existing ones. This will not only make one more valuable to their current employer but also make them more marketable to potential employers.
Refresh Your Resume
When was the last time you refreshed or updated your resume? If you were like me, you would never have done it while still working.
It’s unsurprising because you’re not in “job search mode,” so you don’t think to update it. Now is the perfect time to do it because your work is still fresh in your mind. Make it a practice to update your resume every six to twelve months because you don’t know when you’ll need it.
Start Networking
You’ve probably heard phrases like “the best jobs are not advertised” or “most jobs are filled by networking.” While the stats may not be accurate, their idea holds merit.
Networking plays a significant role in hiring because relationships are essential. It’s not simply how many people you know but the closeness of those relationships.
You can develop your network by meeting more people and growing those relationships over time. Attend industry events, conferences, and seminars to meet new people and expand your professional network. This may not always lead to a new job, but it doesn’t hurt.
Job Security
Job security is crucial during a recession. One should take steps to ensure their job is secure, such as performing well at work, building a good relationship with their boss, and proactively seeking new projects or responsibilities. It is also essential to have a backup plan in case of job loss, such as having a savings account or exploring other career options.
Build an Emergency Plan
Saving enough money into an emergency fund is essential, but what will you do when something happens? What will you do if your company lays you off?
The best time to build an emergency plan is before you need it. You want to develop it today, while you’re calm and of sound mind, and not when you’ve just been told you’ll be fired in 2 weeks. That version of you will be panicking and emotional.
Start Budgeting Today
If you don’t have a good idea of your budget, now is the time to use tools to establish a budget. You need this because it tells you exactly where you are from an income and expenses standpoint.
If you do lose your job, you’ll know what expenses you can cut today to start saving money. You can also make intelligent decisions about those cuts so you aren’t depriving yourself of important things.
For example, if I lost my job today, I’d cancel all our streaming entertainment services.
Learn the Unemployment Insurance Process
If you are fired, you will qualify for unemployment insurance in your state. Now is the time to learn how to navigate that process because it’ll be a hundred times harder if you try to do it after realizing you’ve been fired.
Learn what documents you need and see if you can collect any of those today. In Maryland, you need documents like paycheck stubs, W-2 forms, etc. You probably already have those; stick them in a folder so you’re ready.
Prepare for Other Emergencies Too
Losing your job is the most significant risk but not the only risk. Your car doesn’t know we are worried about a recession, so it could still have problems. Make sure you remember the other potential risks in your life and prepare for those as well.
A recession is a significant economic risk but it’s hardly the only one we face daily.
When Recession Fears Pass
There will come a time when fears of a recession will pass, and economic growth and prosperity are on the horizon. We won’t know when that time will come, but I sense that you can tell based on the mood and gossip in your company.
When this happens, the only step you need to take is to reconsider how much you’re saving in your emergency fund. You can use those savings towards other savings goals or your retirement accounts.
Fortunately, every other step I’ve outlined in this article is beneficial for your finances and something you should keep doing.
