Are You Prepared for a Recession?

You know I am a big believer in “hope for the best, plan for the worst.” And right now you really need to get serious about planning for a recession.

None of us knows if a recession will indeed strike soon, but given what is going on in our economy, it is looking like it could very well happen within the next year. As you know, the Federal Reserve is now aggressively raising its key interest rate—the Federal Funds rate—in an effort to help slow down the rate of inflation. That is necessary, but what you need to understand is that when the Fed has to resort to this policy it can cause the economy to fall into a recession, as the higher interest rates make it harder for businesses to finance their operations, and for consumers to consume. Higher car loan rates, mortgage rates, and credit card rates become a spending headwind.

The question you should be asking yourself right now is not “if” a recession is likely, but: how prepared are you for when a recession hits. It may be this year or next. Who knows? But the time to plan for how you will be able to survive is right now.

Assume you are laid off.

I am well aware that the unemployment rate is low, and it’s been a great time to move to better jobs. I sure hope that doesn’t change anytime soon. But if there is a recession, you better believe the same firms that are hiring now, will be looking to reduce their payroll.

I think the best gift you can give yourself right now is to imagine you are laid off. How many months of living expenses do you have in your emergency savings fund? Your long-term goal should be to amass savings that can cover you for up to a year, but right now you should be hustling to increase your savings as much as possible. If you currently have one month saved up, push yourself to get to two months, ASAP. Have six months saved up? Great. Get it to 7 pronto. That’s how you can rest easier if you are laid off or have your hours reduced in a recession.

Get rid of credit card debt.

You are asking for so much trouble if you carry credit card debt right now. The interest rate you are charged is rising. And if you are laid off and can only make the minimum payment each month, that higher interest rate will cause your balance to grow.

Live below your means.

You should always be heeding this advice, but right now it’s the best advice I can give you. When you live below your means, but within your needs, you will have two payoffs. For starters, your living costs will go down. If you were laid off, that means your emergency savings will last longer. And when you reduce your spending today that will give you more money to put toward building recession protection. A dollar not spent is another dollar you can add to your emergency savings or use to reduce your credit card debt.