With talks of a recession looming (or already here?), now is the time to get our financial wellness in order and have a plan in place to prepare for potential changes. This is particularly important for people already living a very budgeted life or just getting by from paycheck to paycheck. For help, we turned to two finance pros for advice. Below, consumer finance and budgeting expert Andrea Woroch and Colleen McCreary, Credit Karma’s consumer financial advocate, share six ways to prepare for a recession.
Create a budget
First, McCreary recommends creating a budget. Don't think of it as deprivation; think of it as a tool that empowers you with more control over your money. At its most basic level, McCreary says a budget helps you understand how much money comes in and goes out each month. This information allows you to allocate your funds appropriately to achieve your financial goals and avoid overspending. And most importantly, a budget helps keep you accountable. “By creating a roadmap and setting intentions around your spending, you increase your chances of following through with your budgeting goals,” she says.
Contribute to an emergency fund
Next, McCreary advises working on building up an emergency fund if you don’t have one already. Recession or not, it's always a good idea to save money to cover unexpected expenses that inevitably pop up (because life). Ideally, McCreary says everyone should have enough funds in their emergency savings to cover three to six months of living expenses. However, she acknowledges that that isn’t the reality for people who live paycheck to paycheck. In these cases, McCreary recommends saving as much as you can, even if it’s a small amount, from each paycheck and working steadily towards your goal.
Lower your living expenses
One way Woroch recommends finding funds to put towards your emergency savings is by reducing your monthly living expenses. “Spend time scrutinizing your bills for services you don’t need or compare rates with competitors, as you may be able to save more by switching,” she says. For example, many people spend money on unnecessary unlimited data plans for their phones. The same goes for car insurance. Woroch and McCreary recommend shopping around and negotiating better rates. Any little bit you can save counts.
Diversify your income
In addition to lowering your living expenses, increasing your income will also stretch your budget further. In particular, Woroch suggests creating multiple income streams as a strategy for recession-proofing your finances and creating more financial security. Having additional income streams on the side allows you to lean on those sources should your main source take a hit (i.e., you lose your job) without needing to dip into your savings or take on debt to get by. “Even if you don't have that much extra time to build a side business, there are flexible side hustles just about anyone can take on in their spare time,” Woroch says. Examples include tutoring, pet sitting, dog walking, or offering services as a freelancer.
Pay down debt
With rising interest rates, one of the key ways to prepare for a recession is to focus on paying down debt, specifically credit card debt. “It’s best to prioritize debt with the highest interest rates—a repayment strategy known as ‘debt avalanche.’” McCreary says. “That’s because credit cards typically have higher interest rates than other loan types, like personal loans or student loans, which makes them a strong jumping-off point as you embark on your debt paid down journey.”
In other words, focus on paying off high-interest debt first. If you carry high-interest debt across multiple credit cards, Woroch recommends consolidating with a low-interest personal loan or transferring the balances to a zero percent balance transfer card, which can give you 12 to 21 months to pay down the debt without any interest fees.
Take advantage of cash back rewards
That said, there are some perks to using credit cards such as cash back rewards. Woroch says the key is finding a credit card with cash back benefits that match your spending style. For example, if you spend a lot on online purchases, opt for a credit card that has a higher cash back rate for things you buy online. Or, you can also go for a credit card with a flat-rate cash back on all purchases.
Woroch adds that you can also use other tools to stack your cash back earnings further. For instance, she recommends using the Fetch Rewards app, which rewards you with points for scanning receipts. You can then redeem those points for gift cards. Cash-back plug-ins like Rakuten also allow you to earn money for online purchases you were already going to make.
All in all, incorporating these changes into your financial wellness routine can go a long way in preparing your financial situation for a recession—or whatever else may happen.
Loading More Posts...