Regardless of what the future holds, there will always be economic booms and busts.
A recession is looming, some economists say, while others believe it can be avoided.
The good news is that the best financial strategies apply regardless of whether or not we are entering a recession. It’s always a good time to pay down debt, build your emergency fund, and develop skills that can lead to a more lucrative career.
“A lot of the advice I would normally give applies just as much right now as it does at other times,” says Sophia Bera Daigle, CFP and founder of Gen Y Planning, a financial planning firm. “Focus less on what’s going on in the real economy and more on what’s going on in your own personal economy.”
As you consider how best to navigate economic uncertainty, here are the fundamental principles for putting your finances on solid footing.
How to prepare for a recession
The word “recession” may raise your anxiety a notch or two, but it may not be as scary as it sounds. The definition of a recession is negative economic growth (measured by gross domestic product or GDP) for two consecutive quarters, which is six months.
Since World War II, recessions have lasted an average of about 11 months. By the time a recession is officially announced, we’re already six months into it, says Emily Liou, founder and career advisor at Cultivitae. “So it’s about weathering the storm for another five or six months.”
That is how:
make a financial plan
Knowing what your income and expenses are and having a clear plan for the money you’re earning can help ease financial stress. Budgeting can help you adjust your spending habits and prioritize your goals.
Have a plan to help you avoid taking on too much debt or paying off your existing debt. But you don’t need to focus only on paying down debt or building savings, you can also be investing for the future at the same time. “I think it’s a great time to keep saving for retirement, the stock market is down and stocks are for sale,” says Bera Daigle.
You’ll also want to have a plan for when your income or expenses change unexpectedly. This is an especially important conversation to have with other people in your life for whom you are financially responsible. If you’re in a relationship, you may have different opinions on how to attack your finances, says Sahirenys Pierce, founder of the personal finance site Poised Finance. “It’s really important to start brainstorming and thinking about what options I have financially, if I’m going to have a recession or a tough time.” Knowing ahead of time what expenses you can reduce or eliminate can make difficult decisions a little easier.
Create an emergency fund
Having money set aside for emergencies or to cover a job loss is an important part of preparing to successfully navigate uncertainties. Save at least three months of net pay for emergencies, says Bera Daigle.
Although experts differ on how much you should have in an emergency fund, it’s a vital tool for navigating job loss, medical bills, or expensive vehicle repairs. Once you’ve created an emergency fund, it’s okay to use it.
It can be really hard for people to get money out of their emergency fund, says Pierce. Replenishing your emergency savings can seem like a daunting task. “But we also have to remind ourselves that this is a natural part of our finances,” says Pierce, who recently had to dip into his emergency fund for a family emergency.
develop your career
When it comes to protecting your career against the recession, it’s best to be proactive, not reactive. “One of the best things we can do is … take control of what is in our control,” says Liou. I believe in planting seeds today, so that when you need something you don’t start from scratch, she says.
Start preparing your resume, LinkedIn profile, and grow your professional network now. Always work on developing your professional skills and experience because “you hire good people,” says Liou. Even in a recession, certain industries or companies can prosper.
To identify which companies are growing, look for those that are hiring job recruiters, says Liou. “The companies that are hiring [recruiters] they’re not hiring recruiters because they’re laying people off… they’re looking for more talent,” she says. “The truth of the matter is that we always have opportunities, even in the worst of times.”
To find thriving companies, look for job recruiter openings because companies that hire recruiters are growing.
Approach your career with the goal of constantly evolving and growing. Liou’s rule of thumb is to aim for jobs where you meet 70% of the job description. That other 30% gives you the opportunity to learn new skills and grow. When you meet all the requirements of the job, it could be seen as a red flag, says Liou. It could be seen as overqualified and the translation for a hiring manager is that this person will be bored, this person will not feel challenged, she says.
Expand your sources of income
Consider addressing budget constraints or increasing your savings rate by finding creative ways to earn extra money. Cutting costs isn’t fun, it’s not a good way to motivate people, says Bera Daigle. If someone can generate an extra $5,000 to $10,000 a year to invest, seeing that impact “is more motivating for people,” she says. “You’d be surprised how creative people can get when it comes to that sort of thing.”
You can add a level of stability to your finances by diversifying where you earn your income. Building a side job, freelancing, or working part-time could add extra security to your budget. “Entrepreneurship is the new job security for our generation,” says Bera Daigle.