Recessions can occur at any time, often with little warning. Who, after all, expected in that the economy would be all be shut down by an infectious virus?
Prudent financial management means being prepared for the worst. Here are three ways to you can recession-proof your finances.
During recessions, demand for many goods and services drops. This leads to cutbacks, which often results in layoffs.
While nothing is ever guaranteed, several jobs and industries are more shielded from the negative effects of a down economy. What these vocations usually have in common is that people depend on them regardless of the economy. Examples include:
- IT professionals
- Medical professionals
- Law enforcement
- First responders
- Public utilities
- Financial services
- Funeral services
- Government positions
- Social workers
- Senior care providers
- Auto repair
- Home services, including pest control, HVAC, plumbers, etc.
If you can't find a recession-proof job that interests you, consider taking your skills to a recession-proof company.
These are often firms with a long history. Having stayed in business for decades means these companies have endured through several recessions. Long-time companies also know how to reinvent themselves when times change.
Another option is a company that caters to a large number of customers or to those that help people save money, such as discount retail stores.
Another way to prepare financially for a recession is to recession-proof your investments.
You can employ some of the same strategy with investments as with your profession: Look for companies or mutual funds that have long histories or that sell products and services that people need no matter the state of the economy. Examples of industries to invest in include health care, consumer products, and utilities.
Experts also suggest investments that pay an income, such as real estate, dividend-paying stocks, and bonds.
Mutual fund categories that tend to do well during recessions include federal bonds, municipal bonds, money markets, and large-cap stocks.
Lastly, preparing for a recession includes reviewing your budget for ways to save more and spend less.
For starters, everybody should have an emergency fund. If a recession causes job loss or reduced hours, life’s needs and bills won’t stop. An emergency fund can help you stay on top of your finances if you temporarily lose some of all of your income.
Financial experts agree that your emergency fund should hold an amount equivalent to at least three months of take-home pay. Another rule of thumb is to have enough to cover essential expenses for three to six months in the event you have no income.
It’s easier to save money in an emergency fund if you find ways to spend less. Plus, by spending less in your regular budget, your emergency fund can last longer. Ways you can cut items out of your budget include:
- Track your spending, especially on small, regular expenses that can quickly add up such as morning coffee runs, lunches out, and mobile apps. Think about whether you can do without some of these regular luxuries.
- Know which regular expenses you can cut altogether if your income is adversely affected. These may include TV/streaming services, fitness club memberships or classes, lawn care services, and salon visits.
- Try to reduce your usage and spending on gas and utilities. Drive less, keep lights and electronics off when not in use and look for ways to reduce water usage.
- Find inexpensive and free entertainment options. Many local museums are free, as are city parks. Libraries are also a good source of entertainment options.
- When possible, pay more than the minimum amount due on debt payments to eliminate debts sooner. It also helps to reduce your expenses during unemployment because you can then lower your debt payments to the minimum level until you’re working again.
- Look for ways to reduce the interest on credit cards, student loans, and other debt.
- Keep your credit score as healthy as possible so you can pay the lowest interest rates on debt.
This is also a good time to buy an individual disability insurance policy if you don’t already have one. If your only coverage is a group policy through your current employer, you will lose it if you lose your job. And there’s no guarantee your new employer will offer a group plan.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
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