When extreme weather is forecast, chances are you don’t sit by idly and hope it isn’t as bad as meteorologists predict. The same should be true for a recession.
The growing consensus among economists is that the U.S. economy will enter a recession in 2023. Recessions tend to go hand in hand with major stock market declines and widespread unemployment.
Without proper preparation, recessions can irrevocably damage your financial stability. That’s why now is a good time to start if you haven’t begun already, financial advisers say.
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Start an emergency savings account
A rule of thumb is you should have enough savings to cover three to six months’ worth of expenses.
But if you don’t, you’re in good company – 40% of Americans didn’t have enough money to cover at least three months of expenses if they lost their primary job, according to a survey by the Federal Reserve in 2021.
That share probably is even higher this year with inflation hovering at a 40-year high.
Even though it could take years to build an emergency savings account, you’re better off starting later than never.
Try to put aside just enough so you can scrape by on a strictly bare-bones budget for three months in case you lose your job, said Brian Robinson, a financial adviser and partner with SharpePoint.
“It doesn’t give you a chance to be lazy and sit around,” Robinson said. “It gives you a chance to say: ‘OK, we’re now on budget No. 2, the real strict one. We’re in survival mode while we go look for a job.”
Consider automatic paycheck deposits into a savings account to lessen the temptation to spend that money. Resist using that money to pay credit card and other recurring expenses unless you absolutely must, advisers suggest.
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What types of purchases should you put off?
Every penny saved now is a penny earned for when you could need it most.
That’s why Robinson recommends putting off “nice to have” purchases. For instance, if your refrigerator breaks, get it repaired or buy a new one. But if the blow dryer you’ve owned for five years still gets the job done, just not as good as a newer one, hold on to it – and your cash.
Also take inventory of all your monthly subscriptions and ask yourself which you could live without, then cancel those. Or, think about switching to a lower-tier subscription. For instance, next month Netflix is rolling out an ad-supported subscription for $3 less than its lowest-tier ad-free subscription.
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“You don’t want to take on more expenses than you really need to if you’re expecting economic hardship or an upcoming recession,” said Frank Newman, a portfolio manager at Ally with experience in wealth management.
Prices for many types of discretionary goods tend to drop in a recession when everyone is cutting corners, Robinson added.
What should you buy before a recession?
It’s not a bad idea to stock up on household goods and shelf-stable foods now while you still have a regular paycheck if you’re afraid you won’t have one in a couple of months, Robinson said.
But don’t get carried away, he said. “I’m not saying go out there and act like the sky is falling and there’s a nuclear winter.”
Try to pay off as much debt as possible, particularly any high-interest debt, Robinson said.
What should you avoid doing in a recession?
Avoid spending frivolously and going off budget during a recession, Robinson said. And if possible, Newman said, avoid taking on more debt.
Elisabeth Buchwald is a personal finance and markets correspondent for USA TODAY. You can follow her on Twitter @BuchElisabeth and sign up for our Daily Money newsletter here