Depending on who you ask and the definition they use, a recession has occurred or is about to occur. The traditional definition is two consecutive quarters of economic decline measured in Gross Domestic Product. A more complex definition is a slowing of economic activity and an increasing unemployment rate.
Financial and lifestyle preparations for a recession should be undertaken now to lessen the effects should it occur. And if it does not, then you will be even better prepared for any economic shock that could unexpectedly occur.
What you need to do in preparation for the arrival of a recession:
- Examine your monthly budget
You cannot save money that you have already spent. Almost everyone has regular, recurring expenses that are not necessities. Find lower cost alternatives like a home movie night using a streaming service versus a trip to the local cinema. Delaying small and large purchases can free your budget and free your mind from stress.
- Contribute to your Emergency Fund
Once you have identified unneeded expenditures in your regular spending, remove them from temptation by placing them into your Emergency Fund. Having 3 to 6 months of income set aside is recommended.
- Maintain your scheduled savings contributions
Whether a recession occurs or not, continue adding to your savings in RRSPs and TFSAs, and education savings in RESPs. Skipping a few monthly contributions could free up a few thousand dollars now, but losing out on the compound interest could cost you tens of thousands of dollars at retirement. Treat savings like one of your bills that you pay first, just like your mortgage, insurance, and utilities. Paying your savings first helps reinforce your budgeting efforts.
- Reassess your investments
During a recession, some types of investments can withstand the challenges better than others. Should a recession occur, each family will be affected uniquely and their situation could affect the suitability of some investments. A frank conversation with your financial professional is an excellent step to preserve assets and investment income.
- Reduce, eliminate, and avoid debt
Paying high interest rates is never a great idea, so it is best to pay them down as quickly as possible. Interest rates are rising on the actions of central banks around the world, and those high interest rates will rise even higher. Taking on new debt that will increase your monthly expenditures for both capital repayment and interest charges is not advisable.
- Update your skills and resume
Should your employment be affected personally, it would be better to be prepared than react when feeling the pressure of replacing your existing income. Consider investing in yourself by taking internal and external courses to bolster your skillset. Revisit and update your resume with your newly acquired skills and capabilities.
The Bottom Line
None of the six steps above require a recession or even the threat of recession to become valuable. Each of them is prudent regardless of the overall economic and employment climate, so be prepared for a rainy day, and you will be able to enjoy the sunshine too.
If you would like a personal consultation, please contact Winnie at email@example.com to set up an appointment with Kari to help you remain objective and focused on your future goals, while planning for a healthy financial future.