Are we in a recession? Our financial experts already got to the bottom of this question in August 2022. Their conclusion: the consequences of the pandemic and inflation have already foreshadowed an imminent recession last summer.
Now most economists agree: a recession in 2023 is inevitable; the only question is how hard it will hit consumers.
The outcome depends heavily on governments and their crisis management, as well as on banks and their monetary policy. While this article doesn’t focus on the reasons or economic solutions for a recession, it does aim to illustrate how much leeway we as individuals have in such times of crisis. How can we protect our assets and our jobs – and what is a recession, anyway?
Here’s BudgetBakers’ step-by-step guide.
What Is a Recession?
Generally speaking, a recession is a period of economic downturn, typically characterized by a decline in gross domestic product (GDP), a high unemployment rate, and a reduction in business activity.
Recessions are typically accompanied by a fall in asset prices, such as stocks and real estate, and can have a variety of negative impacts on individuals and businesses.
In the United States, a recession is officially defined as two consecutive quarters of negative economic growth, as measured by GDP.
While recessions are a natural part of the economic cycle, they can be difficult for people and businesses to endure, and policy makers often try to mitigate their effects through various measures, such as fiscal and monetary policy.
Take These Steps to Prepare for a Recession
The IMF, the International Monetary Fund, predicts that about a third of all economies will experience a recession in 2023. And even for countries that manage to keep growing it will feel like a recession.
We as consumers experience prices for everyday items rising faster than our wages, leaving us with less spending power. The profitability of companies is squeezed by higher prices and therefore weakening demand.
So what options do we have to counteract insufficient wages and inflation of goods? There are several steps you can take to prepare for a recession:
1. Create an emergency fund
Having an emergency fund can help you weather financial setbacks and unexpected expenses. Aim to save enough money to cover at least three to six months of living expenses.
An emergency fund is a savings account that is specifically set aside for financial emergencies. Having an emergency fund can provide a financial cushion. And help you to manage unexpected expenses without having to borrow money or go into debt. Here are some steps you can follow to create an emergency fund:
- Determine how much money you need to save
Start by considering the types of emergencies that might arise and how much they might cost. For example, you might want to save enough money to cover unexpected car repairs, medical expenses, or home repairs.
- Set a savings goal
Based on the amount of money you need to save, set a goal for how much you want to save in your emergency fund.
- Choose a savings account
Look for a savings account that offers a high interest rate and low fees.
- Set up automatic transfers
To make saving easier, consider setting up automatic transfers from your checking account to your emergency fund account.
- Be disciplined
It can be tempting to dip into your emergency fund for non-emergency expenses. But it’s important to be disciplined and only use the money in your emergency fund for unexpected expenses.
Remember, the goal of an emergency fund is to have a financial cushion to fall back on in case of unexpected expenses or emergencies. It’s important to save enough money to cover your needs, but also to be realistic about how much you can save.
2. Pay down debt
Try to pay off as much debt as possible, particularly high-interest debt such as credit card balances. This will make it easier to manage your finances if your income decreases during a recession.
Paying down debt can be a challenging task, but there are a few strategies that may help you succeed:
- Make a budget
Figure out how much money you have coming in and going out each month. This will help you identify areas where you can cut back on spending and redirect that money towards paying off your debt.
The easiest and fastest way to get an accurate overview of all your finances is to use a budgeting app like Wallet by BudgetBakers. With just a few clicks, you can sync all your bank accounts, track your income and expenses, and set realistic goals – like paying off your mortgage debt in a certain amount of time.
- Prioritize your debts
It may be helpful to prioritize which debts to pay off first. One strategy is to focus on paying off high-interest debts first, as they can cost you more in the long run. Alternatively, you could tackle smaller debts first to get a quick win and build momentum.
- Consider a debt consolidation loan
If you have multiple debts with different interest rates, you might consider taking out a debt consolidation loan. This involves taking out a new loan to pay off your existing debts, ideally at a lower interest rate.
3. Build up your savings
In addition to building an emergency fund, try to save as much money as you can in a savings account or other low-risk investment. This can provide a financial cushion if you experience a loss of income during a recession.
There are several strategies you can use to build up your savings:
- Make a budget
Again, the first step to increase your savings is to create a budget with the help of a budgeting app. FInd out how this is done in the above chapter “Pay down debt”.
- Set savings goals
It can be helpful to set specific savings goals to give yourself something to work towards. Make sure your goals are realistic and achievable, and consider breaking them down into smaller, short-term goals to make them more manageable.
- Automate your savings
One easy way to save money is to set up automatic transfers from your checking account to your savings account. This way, you can save money without having to think about it.
- Cut expenses
Look for ways to cut back on your spending. This could involve things like cooking at home more often instead of eating out, canceling subscription services you don’t use, or negotiating lower rates for bills and expenses.
- Increase your income
Another way to boost your savings is to increase the amount of money you have coming in. This could involve taking on extra work or negotiating a raise at your current job.
- Keep your savings separate
It can be tempting to dip into your savings account when you have unexpected expenses or see something you want to buy. To help prevent this, consider keeping your savings in a separate account, such as a high-yield savings account or a certificate of deposit. This will make it less convenient to access your savings, which can help you resist the temptation to spend them.
5. Be mindful of your spending
In addition to building an emergency fund, try to save as much money as you can in a savings account or other low-risk investment. This can provide a financial cushion if you experience a loss of income during a recession.
Being mindful about your spending means paying attention to how you use your money and making conscious choices about your purchases. Here are a few tips for being more mindful about your spending:
- Set financial goals
Knowing what you want to save for can help you make more mindful spending decisions.
- Track your spending
Keep track of your expenses to see where your money is going and identify areas where you might be able to save.
- Avoid impulsive purchases
Take time to think about whether you really need something before you buy it.
- Shop around
Don’t be afraid to comparison shop or negotiate to get the best price on something.
- Use cash
Paying with cash can help you be more mindful of your spending because it’s harder to part with physical money than it is to swipe a card.
- Take breaks from shopping
If you find that you have a tendency to overspend, try taking breaks from shopping to give yourself time to think about your purchases.
