Most experts agree that the U.S. economy is currently heading into some type of recession. Many people are already out of work, and many others are heading into a period of economic uncertainty.
Yet, in those stories about a coming economic recession, there’s almost always a key part missing: what does it mean for me in a practical sense? Obviously, a recession means a higher unemployment rate, which means a little more job uncertainty for lots of people and a little bit more difficulty finding work for those unemployed, but what does that mean in terms of practical steps?
Yesterday, I offered a checklist of things people should do if they find themselves unemployed, but what if you’re in the other boat? What should you do if in the face of an oncoming recession if you still have a job and feel at least somewhat secure in that job?
Here’s a checklist of things you should be doing in the face of a potential recession.
1. Cut back (but don’t eliminate) spending on non-essentials.
In terms of preparing for a recession, the single most effective choice you can make that provides immediate impact is cutting back on your own spending. Cutting spending is a decision that immediately results in at least some money in your own pocket, and those immediate rewards can be used to accomplish many of the other things on this checklist.
The key when it comes to cutting spending, however, is to focus on the unimportant and less-important spending above all else. When people think of “cutting back,” they almost always think of the products and services and experiences they care about most, and that results in negative feelings about the entire idea of cutting back. Those are the things you actually shouldn’t cut (unless it’s a last resort). Rather, you should go through your life and look for ways in which you’re spending money that bring little or no value into your life. Here are some powerful ways to do just that, even during social distancing.
Switch to store brands. This is a really simple strategy that will save you a ton at the grocery store on lots of food and household products. Just buy everything in store brand form going forward and only use the name brand form if there’s a genuine problem with the store brand version of the product. It’s a simple switch that can add up to $30 or more off of each grocery bill.
Stop shopping for entertainment. During a period where many of us are staying at home, this is pretty easy, but it applies to online shopping as well as brick and mortar shopping. Don’t simply browse shops as a source of entertainment. Rather, find things to do as entertainment. Don’t browse a bookstore, but instead read a book you have or that you got from the library. Don’t browse Amazon, but instead do one of the many things you can already do at home.
Look for your low-hanging fruit. Go through your credit card and bank statements and highlight any items that you either don’t remember at all, scarcely remember, or don’t remember with any warmth or fondness. Once you’ve done that, look through those highlighted items for routines and patterns in your life that you can easily cut out.
Go through your subscriptions and services and cancel the ones you’re not using very much. Go through your bank and credit card statements looking for automatically paid subscriptions and services. Look through your Amazon account, your Google account, your Apple account, and your PayPal account for other such subscriptions and services. Cancel all of the ones that don’t evoke an immediate strong feeling in you; you can always bring them back later.
Do some simple projects to trim your bills going forward. You can do lots of little things to help keep your energy bills low. You can make sure your ceiling fan is rotating in the right direction for the season (as you move into warmer weather, the fan should be blowing downwards in the middle of the room) by flipping the blade direction switch in the right direction. You can clean the coils behind your refrigerator and freezer to make them run more efficiently and use less energy. Here are forty more ideas along those lines.
2. Get current on all of your bills.
The next thing you should do is make sure that you’re at least caught up and current on all of your bills. You do not want to lose your job in a situation where you’re already behind on your bills, because that puts you in even more of a crisis situation. In addition, when you’re consistently late on your bills, you’re often being hit with a lot of late fees. Plus, being behind on your bills often has a negative impact on your credit score.
Here are some things you should start doing right now to get caught up on your bills.
Tackle the bills one at a time. If you’re behind on several, don’t try to make some radical changes to get caught up on everything at once. Rather, aim to not get further behind on any of your bills and then get caught up on them, one bill at a time.
Contact the issuer of the bill you’re focused on and discuss how to most efficiently get up to date. In times of recession, most companies have pretty good policies for working with customers that are proactive about paying their bills when struggling financially. Call up the issuer of that bill and talk about what you can do to get things going in a better direction.
Call other bill issuers and ask that late fees be waived. It can’t hurt to ask, and many companies will work with customers who are proactive in their efforts. Even if they say no, you’re only out a phone call.
Note that as you get bills caught up, you’ll accrue fewer and fewer late fees, making it easier to catch up on other bills and make other good financial moves. If you’re behind on three bills and each one is dinging you with a $35 late fee, getting up to date on each bill means that $105 per month is staying in your pocket that was previously vanishing due to late fees. That money can really help with the other measures in this article.
3. Start shoring up your emergency fund (or building one if you don’t have one).
An emergency fund is simply a pool of money you have set aside for emergencies of any kind — a job loss, a car problem, an unexpected family issue, an illness, and so on. Having that pool of money waiting for you for those events makes them much easier to handle, and this is never more true than during a recession when the odds of a job loss increase (as do the odds of simultaneous unexpected events).
I recently shared a simple guide for starting your own emergency fund, and the strategies there still hold true.
Open a new savings account at a local bank or credit union. Ideally, it should be at a local financial institution, but not the main one you use. This allows you easy access when you need it, but the access isn’t convenient because you won’t be carrying around a debit card that can easily access that emergency fund; instead, the card for accessing that fund should be stored at home in a secure place. You can sign up for an account online with most banks and credit unions.
Set up a frequent automatic transfer, and just leave it on. When you sign up for that account, set up a weekly transfer from your main checking to that savings account for a small amount (I suggest $20 for you and another $10 per additional dependent, as a starting point). Leave that automatic transfer on forever – just forget about it and let the emergency fund build-up.
When you actually have an emergency, tap that emergency fund; aside from that, act like it doesn’t exist. The only purpose of an emergency fund is to be there for you in emergencies. Outside of that, just pretend it doesn’t exist.
If you already have an emergency fund, amp up the contributions. This is a perfect time to set up an automatic transfer into your already-existing fund or to increase that automatic contribution. It can only help protect you against some of the risks of a recession.
4. Pay off high-interest debt, and avoid accruing more debt.
One of the most powerful financial moves you can make as you prepare for a recession is to eliminate your high-interest debt, particularly anything over 10% or anything that could revert to an interest rate over 10%. Credit card debt is the prime culprit here, as are payday loans.
The reason that high-interest loans are so important to target is that by their nature, they generate a pretty high amount of interest each month compared to the balance, which means a significant minimum monthly payment. A debt with a relatively low balance and a relatively high minimum monthly payment is well worth getting rid of, not just because of the money lost to interest, but because it means that you’ve got one less bill to worry about each month, which means it’s easier to do many of the other things on this list.
Here are some tips for getting rid of your high-interest debt.
Order all of your debts by interest rate, and start with the debt that has the highest rate. This is likely a credit card bill or a payday loan. The debt with the highest interest rate is the one costing you the most money in comparison to the amount you owe, which means that it’s the best one to get rid of.
Continue paying your other bills and making minimum payments on your other debts, while making the biggest payment possible on your target. Aim to make a double payment or a triple payment if possible, as long as you’re not accruing any additional debt while doing so. The more you can pay beyond the minimum payment, the faster that debt goes away.
When you eliminate a debt, move on to the debt that now has the highest interest rate. Since you now have one fewer monthly bill to deal with since you just paid off a debt, this one should go down even faster!
If you can, consider reorganizing your debts. For example, periods of low interest rates are a great time to consolidate your student loans and lock in a very low interest rate. You may also want to look into transferring your credit card balance to another card, or to a new card if it lowers your interest rate.
Put off any major purchases for several months (or more). If you’re considering buying a new car using a loan or taking on a mortgage to buy a house, give it several months before making a major move like that. During that time, try to save out of pocket for that expense so that you have a much larger down payment.
5. Check your credit and get it in good shape.
Why is it useful to have good credit if you’re trying to avoid new debt and pay it down? It’s simple – your credit score affects more than just your ability to borrow money. For example, many jobs will check your credit before hiring you, as your credit score is seen as providing a good snapshot of your personal trustworthiness.
Thus, as a recession nears, it’s a good idea to do a basic credit checkup and take care of any blemishes that might appear on your credit report.
Get a copy of your credit report from the Federal Trade Commission. Federal law mandates that all citizens can access their credit report once a year for free from each of the three major credit bureaus. The official portal for doing this is AnnualCreditReport.com, so go there, fill out the forms, and obtain your credit report from one of the three major bureaus. Accessing only one means that in a few months, you can go back and check it again from another bureau.
Examine your credit report for any inaccurate information and get it corrected. The most important thing to look for with your credit report is the presence of any inaccurate information. Is there anything on your report that is inaccurate? There are lots of reasons why inaccurate information may be on your report – identity theft, clerical error, lack of current information — but tracking down each bit of incorrect information and getting it correct is important. This should even include seemingly harmless but inaccurate information.
Identify negative but accurate information on your report and aim to fix it. If you have recent unpaid bills or other issues on your credit report, you should strive to get them fixed. If your credit report includes older bills that have been passed through collections and written off, you’re better off not addressing those debts, as resurrecting them will do more harm than good to your credit.
Don’t worry too much about your actual credit score. There are so many variants on how one’s credit score is calculated that paying for a credit score estimate isn’t a particularly useful move. Focus instead on having a healthy credit report, as that will ensure a healthy credit score no matter how it is calculated.
6. Don’t stress about the momentary state of your retirement savings and other investments, and don’t make sudden investment moves.
During an economic downturn, many investments will rapidly decline in value, setting off a lot of worries about one’s retirement savings or one’s savings for their children’s college education. Here are some practices to follow regarding your investments heading into a recession.
Don’t sell when you see the market dropping. That’s almost always a huge financial mistake, as you lock in losses. Later on, when you want to buy in again, you’re rarely going to buy in at a point where you actually made money on the transition unless you’re incredibly lucky. Timing the market well is impossible even for experts; don’t try it yourself unless you want to ensure your losses.
Remember that your more aggressive investments were done with an understanding that markets will sometimes drop in value. Keep this in mind when you look at your account balances and worry about market dips. If you bought into an investment hoping for an 8% average annual return and you had several years in a row above that, a dip is going to occur to bring it back down to that 8% average. Part of the nature of investing in something with risk is that sometimes it drops in value, and that’s okay.
If the rest of your life is financially stable, consider increasing your contributions. A moment of volatility is actually a good time to increase your regular contributions. If you’re like most Americans who save for retirement using the stock market, one of the best things you can do for your retirement planning is to buy as many shares as possible as far away from retirement as possible, and this provides you with a great opportunity for doing so.
If you feel the need to rebalance, do so using your contributions rather than buying and selling investments. Some people like to balance their retirement investments and other investments according to their own formulas and ratios. If you do that and are about to rebalance, consider leaving your money where it is and instead rebalancing your contributions going forward. For example, if you decide that you need to rebalance some of the money from fund A into fund B, instead change your contributions so that more of your contributions are going into fund B going forward and just let your investments sit where they are.
7. Maximize your professional value.
Obviously, one of the biggest personal finance risks during an economic downturn is the risk of losing one’s job. Losing your job can cause a lot of short term economic pain and can lead to a lot of long term economic consequences, too.
It’s always a good idea to take steps to ensure that your job is secure, but those steps are particularly important during a potential recession. Here are four steps you can take to maximize your professional value.
Get all of your professional skills up to speed. What skills are most in demand in your particular field? If you were to suddenly need another job similar to your own, what things would companies that might hire you be looking for? Those are the exact things you should be shoring up right now. Consider what skills are most valuable for you in your current job and make sure those skills are sharp. If there’s any additional training you can take on, do it, particularly if it’s available through your current job.
Make yourself invaluable at work. When companies decide to let people go, they tend to look for the low hanging fruit. They let go of poor performers. They let go of people who are less reliable. They let go people who are doing jobs who aren’t particularly valuable. Look at your job from that perspective. Are you unreliable? Do you show up at work on time? Do you get the tasks you’re charged with done efficiently? Are you an important part of getting things done? Do everything you can to make sure those answers are as close to “yes” as possible.
Shore up your professional network. Make sure that you have good, established connections with people who work for other businesses in your field. The more people you know in your field, the easier it will be to rebound and find a new job in your field quickly if you are left without work.
Make sure your resume is polished. Take a look at your resume and make sure it’s accurate and up to date with all of your work history, skills, certifications, and other relevant material regarding your career. Make sure that it’s correct and updated on all online services that you use to share your resume as well. This makes it easier to immediately roll into a job hunt if necessary and can even attract attention from people who may be seeking people like you.
8. Be proactive and ask yourself “what can I do today?” rather than putting it off.
The strategies on this list are all active steps you can take to improve your financial state going into a recession, but the truth is that many people will read such a list and yet still not take action. The key to success is action. When you turn the things you learn into action, that’s when things get better.
Decide on something from this list that you can do right now, and do it. Just choose one thing on this list and simply do it, right away. Don’t give yourself time to forget about that task or put it off. Don’t feel like simply reading this article is a step toward preparing for recession, either. Choose an item and do it, immediately.
Make a seven-day or a 30-day plan with a specific action step for each day, and make that into a daily routine. If you have several things on here that you want to do, make up a seven day plan or even a thirty day plan for yourself to take care of ideas you had from this article. Add them to your phone as reminders or to your to-do list and go through them, one action per day, so that you can get a lot of things ready for a recession.
The rest is up to you.