Are you worried about a recession? No one knows exactly what the future will hold, but economists in a Bloomberg survey found there’s a 70% chance of a recession in 2023.
Here’s how to make yourself recession-proof (7 steps!)
1. Define your target emergency fund
Get clear on exactly how much you need for an emergency fund. The biggest immediate threat you have with a recession is experiencing a layoff. ABC reported tech companies like Amazon, Meta, Twitter, Microsoft, and Lyft have laid off thousands. Your best protection against a job loss is to have an emergency fund.
If you struggle with saving money and immediately spend what you saved, then set what I call, your emergency number.
You’ve seen mattress commercials with sleep numbers. It’s an exact number and setting you use to sleep better at night with.
Your emergency number is how much in savings you want and need to sleep better at night (especially in this economy!). This is your financial peace of mind in case of job loss or any other emergency. When you clearly define what your emergency fund is, then you’ll be less likely to tap into it for non-emergency expenses.
Set your emergency number by looking at two things: number of months and monthly expenses.
A standard emergency fund is 3-12 months of expenses. Set the number of months you’re saving for based on your specific situation. For example, if your industry or company is experiencing layoffs now, you’ve lost your job in the past, or you have more anxiety about the economy, then you’ll want six months plus for a fund.
According to the Bureau of Labor Statistics the median unemployment time in 2021 was 19.3 weeks or five months. A three-month fund is on the low-end and might not last through the typical job search.
Next, you’ll multiply the number of months you’re saving for by your monthly expenses. This leads us to step two.
2. Review your current budget
To finalize what your emergency number is, you’ll need to know exactly how much your expenses are. In other words, if you lose your job and income how much money do you need monthly to cover your current expenses?
I recommend filling in your Statement of Cash Flows to see your cash inflows (current income) and outflows (expenses).
Then create a budget, or Income Statement where you can forecast upcoming expenses.
Your spending may seem out of control, but most everything you spend is entirely known and completely fixed. The expenses that vary, like groceries, or happy hours are also predictable.
Here’s more how to create a budget:
3. Save monthly to build your emergency fund
Now you know your ideal emergency fund number, start automatically saving monthly. Saving three plus months of expenses isn’t an easy task, but it’s doable. You just need to START saving now.
The question for most people is what to prioritize: your emergency fund, retirement investing, debt pay off, or buying a home?
I created The Finance Plan, or your step one, two, three, and four with money. I teach this exact process in my upcoming free money class, The Ultimate Guide to Managing Money. Save your spot to this free class now here!
Here’s a quick review of the order of operations I recommend from my free money class:
Step 1: Save 10%- Start automatically saving 10% of your pay. If you’re in debt of the 10% save 5% for a starter emergency fund and 5% to retirement.
Step 2: Get out of debt- Pay all minimums monthly on your debt and an extra $300 or more to the highest interest debt. Once the highest interest debt is paid off, take your old minimum and pay to the next highest interest debt. So on an so forth until you’re debt-free. Once you’re debt-free start investing all 10% to retirement.
Step 3: Emergency Fund- Save 3-12 months of expenses for a rainy day. Take what you were paying to debt and complete your emergency fund.
Step 4: Life purchases- Save for a home, car, once-in-lifetime trip, or retire early.
4. Avoid taking on new debt
Next on how to make yourself recession proof, you need to stop borrowing. This is common sense, but trends according to the New York Fed, show millennials in their 30s have increased debt load by 27% from late 2019 to 2022.
If you buy something on credit, you’re betting your future income will cover these expenses. With uncertain times ahead, don’t sign up for more financial obligations!
Limit your financial commitments and steer clear even from buy now, pay later programs or zero down, zero interest loans.
It’s difficult to avoid debt with inflation and increases in the cost of living. Remember the saying during the Great Depression, “Use it up. Wear it out. Make it do. Or do without.”
Try creative ways to repurpose what you have or wait on new purchases.
5. Pay extra to debt
If you’ve been meaning to get serious about your debt payoff, then use your fear of a pending recession as motivation. Life’s possible without student loans, car loans, and credit cards. Having no monthly debt payments is the ultimate freedom and way to make yourself recession-proof.
Your emergency fund will last longer with no debt payments!
You didn’t get in debt overnight and you’re not going to get out of debt without a good fight. Start paying all your debt minimums plus push to pay an extra Spartan amount of $300 or more to your highest interest debt. Here’s four ways to find motivation to get out of debt.
6. Cut your expenses
To start The Finance Plan and save 10% and pay $300 or more extra to your debt, somethings gotta give! You either need to cut expenses or increase your revenue.
Next, to prepare for a rainy day, look for ways to cut expenses. The easiest method to cut your expenses is what I call the one and done method. Go through all your set fixed expenses and line by line look for ways to save.
Certain fixed expenses you can get rid of altogether like multiple gym memberships or streaming. Others you can reduce, like bundle your insurances or price compare. Try to save the most where you spend the most: your home and car. Consider getting a roommate to lower your housing or sell a car to get rid of an expensive car payment.
This method will take a lot of work upfront, but once the works done you’ll continue to get savings year-round.
Also consider saving money with meal planning, here’s how to meal plan for beginners. Learn this brilliant system for managing money and save on day-to-day purchases.
7. Increase your revenue
Lastly, the final tip to make yourself recession proof is to increase your revenue. It is fun saving money every month, but it’s even more empowering to make more money. Look for side hustle opportunities to bring in an extra income.
This side hustle income can help increase your emergency saving and pay extra to your debt. Use your side hustle also as a way to boost your network, brush up on your resume and interviewing skills, gain a new skill, get paid for doing something you already enjoy, or lead to potential full-time work in case of layoff or job loss.
You can make yourself recession proof with these tips!
❤️ Carly
Want more help? Ready to get your finances in order? Join me live, April 1 for “The Ultimate Guide to Managing Money.” It’s free to attend. Save your spot here. Know of friends, family, or coworkers who also geek out over personal finance? Share this with them!
