If you are feeling apprehensive about the possibility of a recession, there are numerous steps you can take to equip yourself and be ready.

Although it's impossible to predict precisely when a recession may occur, there are prudent financial practices that you can adopt to shield yourself in advance from the consequences of an economic decline. In this article, we will explore what constitutes a recession and present various approaches that can help you protect your financial health.

What is a recession?

Let's begin with the fundamentals. A recession refers to a noteworthy reduction in overall economic activity. Conventionally, this term has been employed to indicate two successive quarters of decline in the gross domestic product (GDP), along with other factors such as unemployment figures. GDP represents the complete value of all final goods and services our country produces and sells.

You don’t need to sit on the sidelines worrying about an impending recession. Instead, you can proactively take steps to mitigate your financial concerns and safeguard yourself from any downturn. As you make preparations, consider concentrating on minimizing expenses, paying off outstanding credit card debts, augmenting your income through additional sources, and increasing your emergency savings. Moreover, if feasible, continuing to invest would also be advisable.

1. Reduce Spending

With the possibility of a recession looming, it's important to prioritize cost-cutting measures. Start by analyzing your budget and determining where your money is being allocated. Once you have a good grasp on your spending habits, get creative and think of some ways - both significant and minor - to cut back on expenses.

For example, you could eat out less, skip a vacation, or even cancel cable TV. You might also consider raising the deductible on your insurance policies, or holding off on non-essential upgrades to your home or car. Remember, it's better to save your money than to take on new debt during uncertain economic times.

It's always a great idea to live within your means, no matter the economic climate. Practicing this habit can help you develop financial discipline and prioritize saving over spending.

2. Boost Your Cash Flow

Having additional cash flow is always a good idea, whether it's through freelancing, consulting, or selling items online, such as crafts or collectibles on eBay. It can help you weather tough times if your income takes a hit during a recession.

If you're interested in increasing your earnings, finding a higher-paying job might be an option. However, keep in mind that changing jobs during an economic downturn can be risky, particularly if you're new to the company. Take your time to think through your decision carefully.

Perhaps you can explore opportunities to negotiate a raise or take on additional responsibilities in your current position instead. By doing so, you can increase your earning potential without the potential risks that come with a job change. Remember, it's always wise to weigh the pros and cons and make an informed decision before making any big career moves.

Another way to boost your cash flow is by temporarily reducing your contributions to your retirement or investment accounts and transferring the funds to a money market account. While this may not be the first choice for most people, some experts suggest it as a last-resort option.

However, it's important to keep in mind that reducing your contributions can have long-term consequences on your retirement savings. So, before making any changes, it's important to carefully consider your financial goals and consult with a financial advisor to make sure you're making the best decision for your individual situation. By doing so, you can ensure that you're taking a strategic approach to boosting your income without sacrificing your future financial security.

3. Tackle Credit Card Debt

In addition to saving money, it's also important to focus on paying down or paying off your credit card debt, especially if you have high interest rates. During a recession, it can be tough to make payments if your income takes a hit, so it's a good idea to take action early on and put as much money as possible towards reducing your debt.

Consider looking into zero-rate balance transfers or a fixed-rate personal loan to chip away at your balance. Also, think about using a portion of your tax refund to pay off your cards.

Another way to tackle credit card debt is to use an accelerated debt payoff strategy like the avalanche method or the snowball method. The avalanche method involves making minimum payments on all your accounts and then putting any extra money towards the account with the highest interest rate. The snowball method, on the other hand, focuses on paying off the debt with the lowest balance first, regardless of the interest rate. Once that account is paid off, you move on to the one with the next lowest balance and continue the same approach.

Each debt payoff strategy has its advantages and disadvantages. The avalanche method can save you the most money on interest payments, but it might take a while to pay off the first debt. On the other hand, the snowball method allows you to pay off debts more quickly, but you'll have to pay more interest charges. Nevertheless, many people find the snowball method to be more motivating since they can see their debts vanish one by one.

4. Increase Your Emergency Savings

We all know that unexpected events or bills can put a dent in our finances. To avoid getting caught off guard, it's wise to stash away enough money to cover three to six months of living expenses. However, during an economic slowdown, it's even smarter to save up more - aim for enough to cover six months to a year of necessary expenses.

The benefit of having an emergency fund is that you won't need to borrow money or take out loans to handle unexpected bills or financial setbacks like a sudden pay cut or job loss. And when the economy bounces back, try to maintain frugal spending habits while topping up your emergency fund so that you're always prepared for whatever the future may bring.

5. Stay Invested

It's totally normal to feel worried when you take a peek at your retirement account balance or investment portfolio and notice a dip. However, experts agree that it's important to avoid making any hasty decisions that you might regret down the line. Even though the markets may experience drops, they typically recover over time. That's why it's recommended that you stick with your investment plan and keep your focus on long-term goals.

Another helpful tip is to review your portfolio's asset allocation. The mix of investments that you chose years ago might not be the best fit for your current stage of life or risk tolerance, especially with a potential recession on the horizon. As you consider new investments or make adjustments to your portfolio, it's crucial to ensure that you're comfortable with the level of risk involved. You can make changes to your portfolio to better suit your current needs.

If you're nearing retirement age, it's especially important to make sure that your portfolio is aligned with your goals. Experts recommend having enough money in low-risk investments that you can access easily when you're ready to retire. Remember, you don't need to use all of your retirement funds right away. Keeping some of it in the stock market can give your portfolio a chance to bounce back when the markets inevitably recover.

Lastly, diversification is a key strategy to consider when building your portfolio. It's a good idea to aim for a mix of stocks and bonds, so that if one type of investment is down, another might be up. This way, you're spreading out your risk and increasing your chances of success in the long run.

Consider a Home Equity Line of Credit

You've trimmed your spending, found ways to generate extra income, paid off your credit cards, and built up an emergency fund. Nice work! But what else can you do to protect yourself from a recession?

During a recession, it can be tough to get approved for a line of credit. But if you’re a homeowner, a home equity line of credit (HELOC) could be a smart option as a backup source of funds. With a HELOC, you can be approved for a line of credit without actually borrowing any money. With good credit, most lenders will let you borrow up to 90% of the equity you have in your home.

How does a HELOC actually work? Well, think of it like a credit card that’s secured by your home. You’ll be given a credit limit and can borrow as much or as little as you need, up to that limit, over a set period of time - usually between five to ten years. HELOCs come with variable interest rates, which means the rate can fluctuate based on market conditions. They typically have lower interest rates than other types of loans because your home is used as collateral.  So it’s important to keep up with your monthly payments because if you fall behind, you risk losing your home. So, before deciding on a HELOC, make sure to carefully consider your financial situation and whether it's the right choice for you.

Take control

While recessions can be challenging, they are a normal part of the economic cycle. However, being ready for a downturn can help you get through it. If you have any questions or would like assistance in planning your finances or saving money, don't hesitate to contact your financial institution.