- Colleen McCreary, chief people officer at Credit Karma
Of all the repercussions of a potential recession, a recent Credit Karma study revealed that Americans are most worried about not having enough money to pay for necessities such as food and clothing (40 percent), and going into debt (34 percent). Similarly, a Bankrate poll found that seven in 10 Americans were worried about heading into a recession. But on a positive note, 74 percent said they were actively taking steps to prepare for an economic downturn, which is exactly what a financial expert would suggest doing at this moment if you asked her how to prepare for a recession.
“Right now is the time to recession-proof your finances,” shares Colleen McCreary, financial advocate and chief people officer at Credit Karma. Below, she shares her top tips for getting yourself financially ready in four steps.
How to prepare for a recession
1. Create a budget
“At its most basic level, a budget helps you understand how much money you have coming in and going out each month while allowing you to determine how best to allocate your remaining funds to achieve your financial goals.”
And it appears like Americans are creating budgets more than ever before, with a recent study by Debt.com finding more than 86 percent track their monthly income and expenses, compared to 80 percent in 2020–2021, and 70 percent pre-pandemic in 2018–2019. “It’s quite likely that both inflation and the pandemic have made Americans keen to budget,” Howard Dvorkin, CPA, and chairman of Debt.com revealed in his report.
2. Cancel unnecessary subscriptions
The average number of media and entertainment subscriptions per consumer was 12 in 2020, with millennials averaging 17, according to Statista. “The various monthly subscriptions, including gaming, meditation apps, as well as music and streaming, can add up,” warns McCreary. “Take some time to go through your statements to target monthly subscription charges that aren’t worth the continued expense.”
3. Avoid credit interest and pay down credit balances
The average credit card interest rate is a high 20.99 percent in September 2022, according to Investopedia, meaning carrying a balance can be very costly. McCreary encourages credit card users to pay off their balance each month to avoid accrued interest. However, for those unable to pay off their monthly balance in full, she advises paying what you can and chipping away at it. “The magic number tends to be 30 percent when it comes to how much of your credit utilization you’re using. Aim to keep your balances below 30 percent.”
More and more Americans are relying on credit cards to get by in this time of rising costs of living. If you have various cards to pay off, McCreary says prioritizing debt with the highest interest rates—a repayment strategy known as debt avalanche. “Credit cards typically have higher interest rates than other loan types like personal or student loans, which makes them a strong jumping-off point as you embark on your debt-paid-down journey.”
4. Start an emergency fund
While the pandemic taught us the importance of having emergency savings, inflation has seen Americans who are comfortable with their savings drop from 54 percent to 42 percent. Meanwhile, those feeling uncomfortable have jumped from 44 percent to 58 percent over the past two years, according to a Bankrate study.
“Having three months of living expenses should be the minimum amount of money saved up in case of an emergency,” says McCreary. “In a perfect world, I’d love to suggest everyone have an emergency savings fund to cover six months or more of living expenses, but I know that isn’t the reality for many Americans who live paycheck to paycheck.” If you’re struggling to create an emergency fund, McCreary suggests starting small and putting away a little amount each paycheck to work steadily toward your goal.
Things to not do ahead of a recession
1. Make rash financial decisions
“If the market takes a turn for the worse, don’t make rash decisions,” McCreary cautions. “Rather, consider riding it out. When in doubt, reach out to a financial advisor before making considerable changes in your investments.
2. Take on more debt
Focus on decreasing your overall monthly expenses instead of adding to them. Avoid buying high-priced items like a car that will put you in more debt,” advises McCreary.
Following McCreary’s financial advice above can help you feel more secure during times of economic uncertainty. Even if you aren’t able to complete each step immediately, chipping away at them little by little will still benefit you long-term. Your future self will thank you.
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