If you’re looking into how to brace yourself for a potential recession, rest assured that you’re not alone. Many individuals have observed declines in stock prices, diminishing real estate valuations, and rising interest rates, prompting questions about what the future holds.
Although a severe recession may not be on the horizon, it’s clear that an economic slowdown is likely. Here are strategies to effectively prepare for a recession.
Understanding a recession
A recession is defined as a period when a nation experiences two consecutive quarters of declining gross domestic product (GDP). While it’s a natural aspect of the economic cycle, no one looks forward to it. Interestingly, government interventions, like managing interest rates, can influence the length and severity of recessions, aimed at mitigating their impacts.
The most recent recession in Canada occurred in early 2020 due to the pandemic causing widespread shutdowns. Various industries were impacted, leading to significant supply chain disruptions and a market crash. However, following government actions to reduce interest rates to near historic lows, the economy rebounded relatively quickly.
Those low rates were not sustainable long-term, as the Bank of Canada (BoC) raised interest rates in 2022 to tackle inflation. As rates increased, many households began feeling the crunch in their finances.
With a potential recession on the horizon, it’s crucial to explore these nine strategies for recession preparedness.
Conduct a financial assessment
Now is an opportune time to revisit your financial health and check your net worth if you haven’t done so recently. Start by reviewing your monthly budget to ensure it reflects your current financial situation, as your income and expenses may have fluctuated since your last review.
Next, calculate your net worth by summing your assets and subtracting your liabilities to get a clear financial picture. This is vital, as having liquid assets, such as those in your Tax-Free Savings Account (TFSA) or employee stock program, could be essential if you encounter cash flow challenges.
Evaluate your investment portfolio to ensure it aligns with your risk appetite and timeline. For instance, nearing retirement might necessitate a preference for more stable investments like bonds or guaranteed investment certificates (GICs). You want to avoid a significant loss in your portfolio just as you are set to begin withdrawals.
Prioritize high-interest debt
As you prepare for the possibility of a recession, aiming to minimize or eliminate debt becomes critical. During your financial review, assess how much you owe and take note of the interest rates and terms of each loan. Prioritize paying off high-interest debts, such as credit card balances. While it’s essential to meet minimum payments on other loans, allocate any extra funds to reduce high-interest debt first.
If you have credit card debt, consider switching to a low-interest credit card that offers a balance transfer. Such cards often provide promotional rates, like 0% interest for a limited period, facilitating quicker debt repayment.
Whether you have high-interest debt or not, it may also be wise to focus on reducing payments for items like car loans or your mortgage to lighten your overall debt load.
Establish an emergency fund
It’s common for companies to downsize during recessions, making an emergency fund indispensable. Ideally, aim to save about six months’ worth of living expenses. This may seem daunting, but even having a small safety net can ensure your survival in a financial crunch, as you could always curtail unnecessary spending.
The easiest way to grow your emergency savings is by consistently setting aside a portion of your income each month until you reach your goal.
Cut back on discretionary spending
To effectively build your emergency fund, it’s essential to refine your financial focus. This includes scaling back on non-essentials like entertainment, luxury purchases, and travel. Additionally, explore how to lower costs for utilities, rent, cable, or groceries.
The goal is to create a financial cushion by concentrating on essential expenditures. This way, you’ll be positioned to handle any situation that arises.
Hold off on investing for now
Every year in January, individuals often prioritize contributions to their Tax-Free Savings Account (TFSA) since fresh contribution room becomes available. In 2023, that amount is $6,500. Parents may also focus on the Canadian Education Savings Grant (CESG) tied to Registered Education Savings Plan (RESP) contributions, while Registered Retirement Savings Plan (RRSP) contributions can be beneficial for reducing taxable income, with a March 1 deadline.
While contributing to these accounts is generally advantageous, it may be wise to pause for now. Keeping some liquidity on hand during uncertain economic times could serve you better. If later in the year you feel more assured about the economy, you can then consider contributing to these accounts.
It’s important to recognize that sitting on your investment decisions might affect your overall returns. During previous recessions, markets recovered rapidly, and those who refrained from investing risked missing out on significant gains. Consulting your financial advisor is wise to discuss the best course of action for your situation.
Ensure liquidity of your cash
After establishing your emergency fund and cutting down on expenses, you might wonder about the best way to manage your money. The ideal solution is to place it in a high-interest savings account, which allows some interest earnings. Digital banks often provide higher rates than traditional banks, ensuring your funds work for you, even if modestly.
Revise your resume and LinkedIn profile
Layoffs in the Canadian tech sector occurred in 2022, and it’s likely that further downsizing could continue in the new year. Even if you’re not in the tech industry, it’s wise to remember that many organizations may reduce their workforce to maintain operational costs during a recession.
Taking the initiative to update your resume and LinkedIn profile can be a proactive measure, regardless of what transpires. Be sure to showcase your recent positions and responsibilities to attract potential employers. Additionally, consider enhancing your skills through professional development courses, especially if your employer offers to cover the costs.
Preparing for new job opportunities shines even during economic downturns, as it provides you with a competitive advantage.
Pursue a side hustle
Given the impact of rising interest rates on many households, some individuals are seeking side jobs to supplement their income. If you have access to a vehicle or scooter, options like rideshare or food delivery services could be viable.
Should you possess specific skills, consider offering your services on platforms like Fiverr or Upwork. You may be surprised at the demand for niche skills.
While side hustles can provide short-term relief, they could also serve as a valuable fallback if you’re laid off during an economic downturn, with some side jobs proving resilient even in tough times.
Stay composed and move forward
Now that you’re equipped with knowledge on preparing for a recession, remember that no one can predict precisely when it will occur or how long it will last. While it’s prudent to strategize for a recession as a part of sound financial management, it doesn’t mean you should let it dominate your everyday life.
Assess your current financial situation and make adjustments to align with your future goals. This doesn’t imply cutting out all enjoyment from your life; rather, it suggests being cautious and refraining from impulsive financial moves until economic clarity improves.