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Does a recession scare the daylights out of you? According to National Bureau of Economic Research (NBER), the U.S. has experienced 33 recessions since 1857. Despite this gloomy statistic, there are habits you may implement at a personal level to lessen the sting of a recession.
Here are a few ideas on putting yourself in a stronger financial position for the next recession.
When a recession is on the horizon, clearing your debts might be the masterstroke you need to weather the storm. Start with the obligations attracting the highest interests, such as credit cards and mortgages. Wind up with low-interest debts such as student loans.
Paying down debts has several advantages; It frees up your income for more flexibility, such as a higher provision for savings, a critical cushion for finances in a recession. Paying down debts also enables you to maintain a good credit score for future borrowing.
A recession comes with the risk of a job loss. Missing out on a paycheck is a difficult predicament to bear. To avert such an eventuality, it is advisable to kickstart an emergency savings kitty. You might start by setting aside a months’ worth of living expenses and build on it.
You might bring down your debt portfolio, but it will count for nothing if the money is not put to good use. And what better use than increasing your emergency kitty. The fatter the emergency savings, the better will be your finances in a recession. Saving in an interest-yielding bank account will further boost your kitty.
In good times, you are likely to add more expenses to your budget, some of which are non-essential. As a recession looms, revisit the budget line by line and cancel off items you can do without. By eliminating the discretionary expenditures, you not only save money but also cultivate new skills such as fiscal discipline.
Discretionary expenses might include;
This is easier said than done, but tightening your belt is a proven way of prepping for a recession. Cutting down on unnecessary spending saves you money and enables you to recover faster from a recession.
How do you know you are living within your means? Financial experts advise having a discretionary spending ceiling of up to 30 percent of your net income. Anything above is overspending and may come back to bite during tough times.
Making your finances recession-proof also implies investing some income for future returns. There are different investment options, such as bonds and stocks. Noteworthy, investments are never risk-free, and you might lose all your savings.
It is prudent to work with a financial advisor to establish your risk appetite and tolerance. The golden rule remains; only invest that which you are ready to lose.