5 ways to protect your finances against the recession right now, according to CFP

Whether or not a


recession

what happens is not in your control, so obsessing over macroeconomic trends or trying to predict what will happen next for the US or the world economy is not a great use of your time or energy.

That doesn’t mean you shouldn’t watch out about these things. But if you want to protect your finances from the recession, then you need to focus on what you can directly influence. When it comes to your money, the immediate thing you have the most control over is your cash flow.

1. Manage your expenses wisely, starting now

Cash flow is money coming in and money going out. The “getting out” part is probably the easiest and fastest to influence.

Try to create a worst-case budget prior to you are in the worst case. Take a look at your current expenses and see what you could cut right away. It’s likely to be things like entertainment, dining, luxury shopping, and other purchases.

Then go one level deeper: What could you not completely eliminate, but could easily spend less on? That could be groceries, household items, or things like transportation or exercise (if you switched from driving to biking, for example, or traded in your exclusive, expensive gym membership for a cheaper option).

This shoestring budget may be the first thing you implement if you’re feeling nervous about a recession. And remember, recessions are usually officially declared after they have started (or even a year after they happened, as was the case with the two-month recession in March and April 2020… which wasn’t declared a recession until July 2021!).

Given that, it’s worth testing your worst-case spending plan before you’re forced to. Spending less now also frees up more cash flow for you to direct toward savings and investments—another great way to recession-proof your personal finances.

2. Increase your earnings, then your savings, while you can

Assessing your expenses to understand what you can eliminate or temporarily stop investing in your budget is a critical step in managing your cash flow. But don’t forget that you can also exert some control over the money-in side.

There are several ways you can increase your income. The right path for you will depend on your situation, your skills, and your interests, but here are some suggestions to consider:

  • Ask about extra shifts or overtime
  • Look for part-time positions that you can take on in addition to your current duties
  • Explore freelancing or additional consulting
  • Take on more responsibilities or projects at work and use them as leverage to help negotiate higher salaries (or consider taking your skills elsewhere while companies are still hiring)
  • Start your own business, but eliminate some of the risk by a) not borrowing money to do it, b) keeping your current job while you start it, or c) both!

And whether you increase your income or reduce your expenses (or both), you’ll have extra cash flow available each month. You can use that extra money to:

  • Replenish your emergency fund, especially if you’re worried about a recession and the possibility of losing your job
  • Increase contributions to your retirement accounts to create long-term financial stability
  • Add to your investment portfolio outside of retirement; for example, you could open and fund a brokerage account (or increase the amount you invest each month if you already have a portfolio outside of your retirement savings)

3. Keep investing

Dollar cost averaging is an excellent strategy for long-term investors to use when putting money into the market. When you calculate dollar cost averaging, you put the same amount of money on a regular, predictable schedule, no matter what.

To protect your finances (and your investment portfolio) from the recession, you should keep investing even when the market is falling. In fact, especially when the market falls

You’re not actually dollar cost averaging when you stop your contributions every time you feel uncertain about your financial future. Instead, you are falling victim to one of the biggest mistakes investors can make: buying high.

If you only invest when the market is up, times are good and everyone feels safe, you are buying at higher and higher prices. And if you don’t keep investing when the market falls, then you’ll never take advantage of the lower prices the market offers.

It can be scary to push your hard-earned money into the stock market when the value of your investments is falling, but savvy long-term investors know that corrections, bear markets, and recessions are actually opportunities to buy long-term assets. lower prices.

4. Review your skills and upgrade as needed

Most people fear recessions because they increase the risk of losing their job and thus their much-needed income. You can help protect your finances from the recession by making sure that, even in a tight job market, you remain a vital resource.

Review your skills and knowledge and compare them to today’s market to see where you might fill a need, or to understand what you might need to get up to speed to stay relevant to open positions.

This also applies if you are self-employed. Need to brush up on the latest trends in your field? Are there training or education opportunities available, or certain clients or projects you can take on now to broaden your experience?

Like everything else on this list, the time to act here is now, before the economy cools down dramatically and companies stop making new hires. If you can increase your value now, that will help you maintain your current position while companies weather the storm of a potential recession.

5. Avoid rash (or expensive!) financial decisions

Now is not the time to take crazy leaps into the unknown with your money, or to take unnecessary and unforeseen risks.

This is especially true for any financial decision that will tie up much of your cash flow, limit your


liquidity

or set a fixed cost too high in your budget.

If you can put off very important financial decisions that could put you in a precarious position, delay those decisions. In the meantime, you can work on building your savings and growing your assets through investment contributions.

That puts you in a stronger financial position in the future, regardless of what the economy does or doesn’t do in the short term. It can also help make it easier to navigate through a tough financial time by making you and your budget more adaptable and flexible.

Ultimately, one of the best ways to protect your finances from a recession is to keep perspective. Don’t make a short-term decision about what should be a long-term play, and remember that recessions themselves are short-term.

They are hard to get through at the moment, but they don’t last forever. Economic trends tend to be cyclical, so lean periods are often followed by periods of growth.

Whether we face a recession in the near future or not, staying focused on the big picture and being proactive are two key ways to safely navigate whatever comes our way.

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