7 Ways to Protect Your Finances in 2023 for a Recession
A recession is defined as a temporary period of economic downturn. A country is considered to be in recession if its Gross Domestic Product (GDP) has witnessed negative economic growth for two consecutive quarters. An economy in a recession may experience unemployment, job losses, business closures, declining incomes, low trade, industrial activity, etc.
A recession is a stage in the economic cycle that is bound to recur over time. All individuals are likely to witness a recession at some point in their life, and feel its impact. Mass layoffs, wage stagnation, and reduced hiring are some common ways most companies deal with a recession. In addition to this, people can also find it hard to obtain credit, making it difficult to get loans to cover the loss of income. The value of financial assets, such as real estate, can also significantly drop in a recession. This directly affects a person’s net worth, making it difficult to make ends meet. While it can be concerning, it is more or less unavoidable. Therefore, you must prepare for it and know what to do with your money in a recession. If you need guidance on how to prepare for a recession and secure your finances, consider consulting with a professional financial advisor who can advise you on the same.
Here are some things that can help you understand how to protect yourself in a recession with minimal harm to your long-term financial goals.
Recession 2023: How to prepare
1. Create an emergency fund
An emergency fund is an essential tool for managing financial risk and uncertainties. It can be helpful in a number of situations, such as a medical emergency, home or car repairs, unexpected family responsibilities and liabilities, and much more. However, it is of most importance during a recession. Job loss and wage stagnation are among the primary issues faced by people in periods of declining economic growth. Some estimates state that over 150,000 tech industry employees lost their jobs in 2022, with an additional 23,000 being let go since the beginning of 2023. According to the Bureau of Labor Statistics, over 30 million workers have seen mass layoffs since 1996. Mass layoffs impact not only for-profit corporations but also nonprofit organizations. An emergency fund can help employees from varied sectors stay afloat during these uncertain times and cover their basic needs until they get back on their feet. In addition to this, an emergency fund can also help deal with the financial stress of a job loss. Some studies show that the stress caused due to unemployment can cause diseases and subsequently increase healthcare expenses. Having an emergency fund provides peace of mind and a financial safety net. It enables you to handle unexpected events without going into debt. It can also help prevent having to sell long-term investments during a market downturn.
If you are wondering where to put your money in a recession, consider a savings account or investment vehicle that offers high liquidity so you can access your funds as soon as you need them. It is generally recommended to have at least six to eight months of living expenses saved in an emergency fund. You can start saving if you do not have an emergency fund yet. If you have one, make sure to check it and ensure it has adequate funds to cover your immediate essential needs.
2. Cut down on expenses
Cutting down on expenses is one of the vital recession survival tips. With wage stagnation, the looming fear of losing your job, and difficulty in obtaining credit, it becomes essential to preserve cash reserves and not spend your money on avoidable things. Budgeting apps can help you control your spending and limit it to crucial expenses only. These apps also make it easier to manage money and eliminate the small, unnoticed expenses that can usually add up to a lot.
There are a number of ways to cut your expenses. You can start by looking for affordable options for your routine purchases. For example, you can negotiate better deals with your insurance providers, gym, and other services. It is important to eliminate anything you do not need, including entertainment, health, and food subscriptions. In fact, it really helps to cut down on socializing if possible. Moving to alternatives like using public transport instead of private can also help. Further, if you have debt, try to pay it off at the earliest opportunity, as debt payments can be a burdensome expense to deal with in the event of a job loss. Additionally, it is essential to make a combined effort towards lowering expenditure. Therefore, try to educate your children and other family members about the difficulties you may be facing. This makes it easier to transition into a relatively frugal lifestyle.
When cutting out expenses, pay attention to your wants and needs. It is not possible to completely cut out all non-essential costs. However, an evaluation of what is essential and what you can do away with can help you figure out the right course of action.
3. Plan your future finances
Significant life events such as a wedding, a house purchase, planning to have a baby, adopting pets, and other similar things can be financially taxing. Each of these events and more can be financial milestones in your life that can lead to high expenditures and recurring expenses, both of which can be hard to accommodate in a recession. It is important to anticipate your needs over the next year and jot down any major life events or purchases that you may have planned. For instance, if you are planning to buy a house, it may be advised to postpone the purchase until after the recession. This way, you can save on mortgage payments, and the down payment can be contributed to your emergency fund. Likewise, those planning to have a baby may consider putting the thought on hold. This is especially important if the parent is in a volatile industry that may see job losses in the coming time.
If you are confused about how to protect your investments in a recession, understand that it is alright to put away future goals like retirement for a brief period. For example, your retirement contributions may be diverted towards your immediate needs like insurance premiums, groceries, rent, etc. However, this should only be done briefly. As soon as the recession is over and you find your footing, it is advised to start focusing on your long-term goals.
4. Learn new skills
Upskilling can help you retain your job and try out for new ones. Mass layoffs can be hard for companies. In these times, most companies make decisions on the basis of the qualifications and specifications of their employees. Upskilling can make you indispensable to the company. It strengthens your chances of staying put. In addition to this, learning a skill can also help you to get a new job if you lose your old one or are looking for a salary hike. Look at the skills in demand in your industry and pick out a course that appeals to your interests, as this makes it easier to grasp a new skill at short notice. Additionally, you can also consider learning skills that can get you part-time jobs.
However, consider the costs of learning new things right now. An expensive degree or course may not be ideal with an impending recession. Therefore, look at courses that can be done online at minimal costs. This way, you do not add to your expenses and, at the same time, create a new source of income.
5. Look for additional sources of income
You can earn money from various sources apart from your primary job. Side hustles like a part-time job, online business, etc., can help you stay afloat in uncertain times. You can also look for passive income sources, such as renting out a property, investing in dividend-paying stocks, creating and selling an e-book or course, or building and selling an app or website. Passive income can provide a source of income that is not tied to the number of hours worked. This can be helpful for parents, people with health issues, and others who lack time to take up a full-time job. Part-time jobs can be excellent to supplement your earnings or increase your overall income.
Passive income also helps you diversify your income sources. Sometimes, some passive income sources may not be as affected by economic downturns or other factors that can impact traditional sources of income. This can help to reduce financial risk and provide a level of financial stability and security.
6. Avoid panicking
While a recession can be a trying time for most families, it is essential to avoid panic and focus on the long term. During a recession, it can be easy to fall into a state of panic. The stock market may be plummeting, businesses may be shutting down, and unemployment may be on the rise. However, panicking during a recession can lead to poor decision-making and can cause unnecessary financial hardship. Recessions are typically short-term economic downturns, and the economy is likely to recover eventually. By keeping a long-term perspective, you can avoid making hasty decisions that may not be in your best interest. For example, a lot of investors are tempted to sell their stocks when the stock markets start to suffer. However, when they do this, they end up missing out on the recovery when the market bounces back. A lot of financial experts feel recession can present great financial opportunities for investors. For example, recessions can be a good time to buy stocks or real estate at a discount, as this can turn into a profit when prices bounce back. You can benefit from the right bets if you have idle money and can afford to invest during this time. However, no matter what you decide, remember to avoid making hasty decisions during a recession. Emotions can run high, and making impulsive decisions is common for most investors. Therefore, take the time to consider your options and decide the course of action based on facts rather than emotions.
It is also important to keep a steady savings rate during a recession. Using the recession survival tips given above may help you achieve this. Further, it is crucial to diversify your portfolio. Diversifying your investments across different asset classes and industries can help reduce the recession’s impact on your portfolio. So, if one sector or industry suffers during a recession, the other investments in your portfolio can help mitigate your losses.
7. Hire a financial advisor
A financial advisor can be a valuable resource during a recession. These professionals can help you understand how to get ahead financially and navigate the economic downturn. A financial advisor can help you understand your risk tolerance and develop a strategy appropriate for your risk level. This can be especially important during a recession, as markets can be volatile and uncertain. A financial advisor can help you understand how to manage your cash flow during a recession. This may include advice on reducing expenses, saving money, and investing in income-producing assets. A financial advisor can help you understand the tax implications of your investments and financial decisions and provide guidance on how to minimize your tax liability. This can help reduce your expenses and preserve cash. A financial advisor can also be a valuable source of emotional support when times get challenging. They can help you stay calm and focused on your long-term goals amidst financial uncertainty.
A recession can be difficult, but it is important to be patient and understand that the economy will eventually recover. These tips can help you protect yourself from most recession-related challenges. Remember not to lose sight of the future and know that this is only a short-term hiccup. Be patient during a recession and avoid panicking, as it can lead to poor decision-making.
If the thought of a recession still worries you, consider hiring a financial advisor that can help ensure you’re financially prepared for future financial emergencies. WiserAdvisor’s free advisor match service can assist you in finding a suitable advisor based on your financial requirements and any recession-related adversity. All you need to do is answer a few simple questions on your financial needs, and the match tool can help connect you with advisors that are best suited to help you reach your financial goals and requirements.