If you’re researching how to prepare for a recession, don’t worry, you’re not alone. Many people have noticed that stock markets have dropped, real estate values have decreased, and interest rates have spiked, so they’re wondering what’s next.
While a great recession likely won’t happen, there’s no denying that an economic downturn is likely imminent. Here’s how to prepare for a recession.
What is a recession?
Technically speaking, a recession happens when a country’s gross domestic product (GDP) drops in two consecutive quarters. It’s a normal thing that’s part of the natural business cycle, but no one ever wants to see one. What’s interesting is that government intervention, such as interest rate policies, can affect how long recessions last. These policy changes are meant to smooth out the effects of a recession.
The last recession to hit Canada was in early 2020, when the pandemic shut down most of the world. Many industries were forced to close, and supply chain issues affected many industries. Stock markets crashed, but after the government lowered interest rates to near-record lows, things recovered quickly.
However, those low rates couldn’t last forever. The Bank of Canada (BoC) was forced to increase interest rates in 2022 to combat inflation. With high interest rates in play, many consumers started to feel the squeeze in their monthly budgets.
The reality is that there’s a looming recession, which is why you need to read up on these nine tips on how to prepare for a recession.
Do a financial checkup
If you haven’t done a financial checkup or net worth update, now is the time to do so. First, look at your monthly budget and see if it’s still accurate. It’s possible that your income and expenses have increased since you last checked.
You’ll also want to calculate your net worth. To do this, you would add up all your assets and then subtract the value of your liabilities. This step is important as it’ll give you a better picture of where you stand. For example, if you have money in your Tax-Free Savings Account (TFSA) or an employee stock plan, you could sell some of your investments if you ever run into cash flow problems.
Take a look at your investment portfolio and make sure that it lines up with your timeline and risk tolerance. If you’re about to retire, you’ll likely want more fixed income, such as bonds and guaranteed investment certificates. The last thing you want is for your portfolio to see a significant decline right before you need to start withdrawing from it.
Focus on high-interest debt
Going into a recession with limited or no debt should be a priority. During your budget/net worth update, you would have figured out how much you owe. Take a look at each loan you have and make note of the interest rate and payment terms. This is relevant because you should always focus on high-interest debt first, like credit cards. You would still have to make the minimum payments on your other loans, but any excess funds you have should be applied to your high-interest debt.
If you currently have credit card debt, consider applying for a low-interest credit card with a balance transfer option. These types of credit cards allow you to transfer an existing balance on your credit card over to a new credit card. This is beneficial because the balance transfer option sometimes comes with a promotional rate, such as 0% interest for a limited time. This will allow you to pay down your debt more quickly.
Even if you don’t have high-interest debt, you could focus on things such as your car payments or mortgage just to reduce your overall debt.
Build your emergency fund
During recessions, it’s common for companies to make job cuts. That’s why having an emergency fund is so important. As a rule of thumb, you want to have about six months’ worth of expenses saved up in your emergency fund. While that may sound like a lot, you only need the bare minimum to survive since you could cut all unnecessary expenses if you run into a cash crunch.
The easiest way to build your emergency savings is to set aside an amount every month until yours is fully topped up.
Reduce your consumer spending
Building your emergency fund is easy if you focus on your financial priorities. That means cutting back on things such as entertainment, luxury items, and even vacations. If possible, see if there are any ways you can reduce how much you spend on utilities, rent, cable, or even groceries.
The idea here is that you want to build a bit of a financial cushion and focus just on your essential expenses. By doing this, you’ll be prepared regardless of what happens.
Don’t worry about investing for the time being
Every January, many people pay attention to their Tax-Free Savings Account (TFSA) since they get additional contribution room. For the record, it’s $6,500 for 2023. If you’re a parent, you might be more focused on the Canadian Education Savings Grant (CESG) that comes with new Registered Education Savings Plan (RESP) contributions. There are also Registered Retirement Savings Plan (RRSP) contributions to consider if you want to reduce your taxable income for 2022. That deadline is March 1.
While making a contribution to any of these accounts is worthwhile, it might make more sense to do nothing for now. Having some extra cash handy during a recession is never a bad idea. If you’re feeling more confident about the economy later in the year, you could contribute to one of your accounts at that time.
It’s worth noting that if you decide to put on a hold on your investment decisions, it may affect your overall returns. During the last recession, stock markets recovered quickly, so people who sat on the sidelines missed out on potential gains. It’s a good idea to talk to your financial advisor to discuss the best strategy for you at this time.
Keep your cash liquid
Okay, so you’ve built up your emergency fund, cut expenses, and you’re no longer investing. You’re now likely wondering what you should do with your money.
Putting your money in a high interest savings account is your best bet since it’ll allow you to earn some interest. The best accounts are usually with digital banks since they offer a higher interest rate compared to traditional banks. You won’t get rich off it, but at least you’ll be earning something.
Update your resume and LinkedIn profile
Layoffs at Canadian tech companies already happened in 2022, so it wouldn’t be a stretch to see further cuts in the New Year. Even if you don’t work in tech, don’t assume you’re immune. Many companies won’t hesitate to shed salaries to keep their operating expenses down leading up to or during a recession.
Updating your resume and LinkedIn profile is a proactive step you can take regardless of what happens. Be sure to list your recent jobs and responsibilities, so potential employers will know what you’re all about. It might also be a good time to take some additional professional development courses to learn new skills, especially if your current employer will pay for it.
Preparing for a new job is never a bad idea. Doing so when economic activity is down just makes sense, as it gives you a leg up on others.
Get a side hustle
With interest rates already affecting many budgets, some people are turning to side gigs to bring in some additional income. If you have access to a vehicle or even a scooter, you could consider doing ride shares or food delivery.
For those with a specific skill set, you could market yourself on sites such as Fiverr or Upwork. You’d be surprised how many people are willing to pay for help, even if your services are niche.
While side hustles are often just a short term solution, they can also help you if you’re laid off during an economic slowdown. Some side gigs are even recession-proof jobs.
Keep calm and carry on
Now you know how to prepare for a recession. That said, no one knows for sure when a recession will happen, nor will they be able to tell you how long it’ll last. Preparing for a recession is smart financial planning, but that doesn’t mean you need to let it take over your day-to-day life.
Analyze where you currently stand, and make some adjustments for where you want to be in the future. That doesn’t mean you need to cut all your spending and not have fun anymore. You just might want to avoid making any impulsive financial decisions until there’s more clarity on the economy.