How to Prepare Your Finances for a Recession
The financial media feasts on doom and gloom.
Anytime there’s volatility in the stock market or weak economic data is released, your social media feed gets flooded with headlines with the following two-step template:
- Insert warning about an impending recession.
- Click here for the answer on how to protect your money.
Here are a few examples of what I am talking about:
Hit the pain point and promise a solution: copywriting 101.
But here’s the truth.
How do you manage money if you think we’re going to go into a recession?
By doing the things, you should already be doing in a booming economy.
- Focus on increasing your savings rate
- Building an emergency fund
- Paying down debt
- Maxing out retirement accounts
- Investing surplus money
- Looking for ways to create multiple income streams
Repeat after me:
I will not panic.
I will stick to my financial plan.
If I don’t have a plan, I will create one ASAP.
I will tune out clickbait headlines encouraging me to panic.
All recessions are personal
For some, it’s the roaring 20s. For others, it’s the great depression. That is my favorite insight from The Psychology of money.
I often write that personal finance is personal.
What I mean by that is that what might be a good financial decision for me may not be a good financial decision for you. It depends on your personal circumstances, goals, and risk tolerance.
Economics is personal too.
The impact the next recession will have on you will be radically different than the impact it has on me.
In every booming economy, there are millions of people who are living in poverty. If you have to choose between putting food on the table or paying the electricity bill, what do you care if we have a low unemployment rate?
On the flip side, many people during the great depression and the 2008 financial crisis became wealthier during these painful recessions.
When it comes to managing money during a recession, the state of your personal finances is infinitely more important than the national unemployment rate.
The last two recessions impacted me in radically different ways
During the financial crisis, I graduated from University with a pile of debt tied around my ankle, had no savings, and could not find a job that paid more than minimum wage.
The five-year period from 2008–2013 was the most difficult of my life. That includes the last two years where I’ve been guaranteed in the house with a newborn baby learning to become a dad during a pandemic.
When COVID-19 rocked North America in March 2020, we experienced the most violent recession since the great depression. The recovery was equally fast, but in many ways, there was more cause for fear than during the financial crisis.
Except I was not worried about my finances at all, even as a new dad.
Because I had:
- A 6+ month emergency fund
- Strong job security
- Multiple streams of income
- A high savings rate, AKA a low cost of living relative to my income
- No consumer debt
Eventhough the national economic numbers were much worse in 2020 than they were in 2008–2009 my personal economic numbers were much better.
Personal financial position > national economic indicators.
Prepare for a personal recession rather than a national recession
Here’s the technical definition of a recession; two consecutive quarters of negative GDP growth.
You should be much more worried about planning for a personal recession which can be triggered by all sorts of events that have nothing to do with national GDP:
- You get fired
- You get sick or injured
- Your car breaks down
- Your roof blows off
- You get divorced
- You make an outrageously bad money decision like buying a boat
Focus less on making money moves dictated by scary headlines and focus more on managing money in a way that will minimize the odds you enter a personal recession.
Become A Money Master
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.