If you’re looking into strategies for getting ready for a possible recession, rest assured that you’re not in this alone. Many individuals have observed declines in stock markets, falling real estate prices, and rising interest rates, which leaves them questioning what to expect next.
Although it’s unlikely we’ll face a severe recession, it is clear that an economic slowdown is on the horizon. Here’s how to effectively gear up for such an eventuality.
Understanding a recession
A recession is officially defined as a decline in a nation’s gross domestic product (GDP) over two consecutive quarters. While this occurrence is a standard aspect of the economic cycle, no one eagerly awaits it. Notably, government measures—like adjustments in interest rates—can significantly influence the duration of a recession. These interventions aim to soften the impact of economic downturns.
The most recent recession in Canada took place in early 2020, triggered by the pandemic that led to widespread lockdowns. Numerous sectors were obliged to halt operations, and many businesses suffered from supply chain disruptions, resulting in a stock market crash. However, after the government cut interest rates to historically low levels, the economy rebounded swiftly.
But such low rates are unsustainable. The Bank of Canada (BoC) had to raise rates in 2022 to counter inflation, which squeezed many households’ monthly budgets.
Recognizing the impending economic downturn, it’s crucial to consider these nine strategies for recession preparedness.
Conduct a financial self-assessment
If you haven’t conducted a recent financial evaluation or updated your net worth, now is the perfect opportunity. Begin by reviewing your monthly budget to ensure its accuracy. It’s possible that your income or expenses have changed since your last assessment.
Next, calculate your net worth by totaling your assets and subtracting your liabilities. This step is vital as it provides a clearer understanding of your financial position. If you have funds in your Tax-Free Savings Account (TFSA) or an employee stock plan, consider liquidating some investments if you encounter cash flow challenges.
Examine your investment portfolio to ensure it aligns with your time horizon and risk appetite. If you are nearing retirement, for instance, you may prefer a higher allocation in fixed-income securities like bonds or guaranteed investment certificates. It’s important to avoid significant losses in your portfolio just as you need to begin withdrawals.
Prioritize high-interest debt
Entering a recession with minimal or no debt should be a goal. During your financial review, assess how much you owe across various loans, including interest rates and repayment terms. Focus on high-interest debt first, particularly credit cards. Ensure you make the minimum payments on other debts but apply any spare cash toward paying down higher interest debts.
If you’re carrying credit card debt, consider applying for a low-interest credit card that offers a balance transfer option. This can allow you to move existing debt to a new card, often with a promotional interest rate of 0% for a limited time, facilitating quicker repayment.
Even if you don’t have outstanding high-interest debt, you could also target your car loans or mortgage to lighten your debt load overall.
Establish an emergency fund
During economic downturns, layoffs often occur, making an emergency fund crucial. Aim to save about six months’ worth of essential living expenses in your emergency fund. Although it may seem daunting, remember that maintaining only the essentials can help you weather a financial crisis.
The most straightforward way to build this fund is to consistently set aside a predetermined amount each month until you reach your target.
Cut down on consumer spending
To effectively grow your emergency fund, focus on your financial priorities, which may mean scaling back on entertainment, luxury purchases, and vacations. Look for opportunities to decrease your utility bills, rent, cable costs, and grocery expenses.
The goal is to create a financial safety net while concentrating on essential spending. This preparation will position you well regardless of what unfolds economically.
Don’t stress about investing for now
Every January, many individuals turn their attention to contributing to their Tax-Free Savings Accounts (TFSA), with the limit set at $6,500 for 2023. Parents may also think about the Canadian Education Savings Grant (CESG) available for new Registered Education Savings Plan (RESP) contributions, and the deadline for Registered Retirement Savings Plan (RRSP) contributions to reduce taxable income for 2022 is March 1.
While contributing to these accounts is beneficial, it may be wiser to pause on investments for the moment. Keeping some cash on hand during a recession can be advantageous. Should confidence in the economy return later in the year, you can re-evaluate and contribute to one of your accounts then.
Bear in mind that halting your investment activities may impact your overall returns. The last recession saw rapid stock market recoveries, meaning those who remained inactive missed potential gains. Consulting a financial advisor can help you determine the best current strategy for your situation.
Ensure cash liquidity
Refresh your resume and LinkedIn profile
Layoffs in Canada’s technology sector were evident in 2022, suggesting that further cutbacks may occur in the near future. However, these challenges can affect any industry. Many employers will aim to lower costs by reducing staff in anticipation or during a recession.
Taking the initiative to update your resume and LinkedIn profile is beneficial regardless of your current job security. Document your recent roles and responsibilities thoroughly, allowing potential employers to gain insight into your capabilities. You might also consider enrolling in professional development courses to acquire new skills, especially if your employer is willing to finance it.
Being prepared to seek new employment is a prudent strategy, particularly during economic downturns.
Explore side hustles
With rising interest rates impacting household budgets, many individuals are gravitating towards side gigs for additional income. If you have access to a vehicle or scooter, options like ride-sharing or food delivery could be lucrative.
If you possess a particular skill set, consider offering your services on freelancing platforms such as Fiverr or Upwork. You may be surprised at the number of people willing to pay for your expertise, no matter how specialized.
While side hustles can serve as a temporary solution, they may also provide a buffer in case of layoffs during economic instabilities. Certain side jobs even remain steady during recessions.
Remain calm and stay focused
Now that you know how to prepare for a recession, remember that the exact timing of economic downturns is unpredictable, and their duration is equally uncertain. While preparing for a recession is a sound financial strategy, it shouldn’t dominate your daily life.
Assess your current position and make appropriate plans for your future. You don’t need to eliminate all fun expenditures; rather, it’s wise to defer impulsive financial decisions until the economic landscape is clearer.