Will we have a recession in the near future? Who knows? It might, nevertheless, be a good time to take a few preemptive steps as we see inflation moving dramatically higher.
“Financial planning” is an umbrella term that can be applied to various aspects of money management. Many people associate financial planning with retirement. However, effective financial planning can help people confront today’s challenges just as much as it can help them prepare for their golden years. Taking steps to recession-proof your finances is an important component of financial planning that can help people overcome the stress of living during a downturn.
Here are a few ideas:
Build up your savings
A recent poll from the Kaiser Family Foundation found that 45 percent of adults said their mental health had been negatively affected due to stress related to the virus. That poll was conducted in March 2020, shortly after lockdown measures were instituted and the term “social distancing” entered the North American lexicon. Each person’s financial needs are different, but many planners recommend clients have at least six months’ worth of expenses in their savings as a cushion to help them get through job loss.
Pay down debt
Debt, particularly high-interest debt, can compromise your ability to save. A recent survey from Bankrate.com found that 13 percent of Americans admitted that debt was preventing them from saving more money. Pay down debt like credit cards and only make credit card purchases if you have the money, pay the bill in full when it’s due.
Avoid overspending
Many financial planners recommend a 50-30-20 approach to money management. Such an approach advises people to devote 50 percent of their earnings to needs, 30 percent to their wants and 20 percent to savings. Spending more than 30 percent on wants can make it difficult to build up a savings account to levels that can protect you in the event of a recession.
Expect the unexpected
If you want to recession-proof your finances, do not take your foot off the gas in regard to insulating yourself from the next recession. No matter how the economy is performing, continue to expect the unexpected and prioritize saving so you have a soft landing awaiting you should the economy again take a sudden turn for the worse.
The timing of recessions is unpredictable, but they are inevitable. Effective financial planning can help anyone overcome the challenges posed by economic downturns.
