Recession-Proofing Your Finances

#budgeting #debt #emergencyfunds #personalfinancetips May 25, 2023

I hate to be a Debbie-downer here....but the Canadian (and US economy) are in the process of slowing down (this is often called an economic slowdown).  This has happened on purpose, because inflation has been so high.  So one of the few ways to reduce inflation is to limit the money supply by increasing interest rates.  Once you limit the money supply, the demand for goods and services slows down.


Sometimes this leads to a recession.  When people hear the word recession, they think "job loss".


And that can be true, because if the demand for goods and services declines, then companies don't make as much profit and sometimes they have to reduce their workforce.


BOO to that!  But it may be the only way that the price of goods and services can come down, and I'm sure you are wishing for a bit of that right now - am i right?


So what do you do to protect yourself during a recession?  Here are some tips:


Make sure you have a fully funded emergency fund.  You never know when you're going to need it.  If you don't have a fully funded one, do what you can to pad the balance of what you do have, just in case.  Remember that as a worst case scenario, you can pull funds out of your TFSA (or ROTH IRA) for an emergency. However, this is NOT a long term strategy I recommend, which is why you need to fund your emergency fund, then put it in a high interest savings account and forget about it - unless you have an emergency.


Do not take on anymore debt.  As indicated above, we are all at more risk of job loss or decreased business income during a recession.  So this isn't a time to be overly risky.  The last thing you want is to lose your job, and default on your loan.  The ramifications of that are years of bad credit, huge interest expenses etc.


Do NOT sell your investments.  The markets will likely suffer during this time and the worst thing you can do is panic and sell.  The markets will recover and when you sell, you are actually realizing the loss.  Whereas if you hold on until the markets recover, you aren't.  Your investing behaviour during a recession shouldn't change as long as you are employed.  Keep contributing monthly and don't get caught up in the news headlines or the short term fluctuations.


Don't take your job for granted.  Even the largest companies are not immune from mass layoffs.  It can happen to anyone.  Complacency is a killer.  It's also not the best time to change jobs.  I mean if you have the worst job ever and you have found your dream job, then make the move.  Just remember that the amount of severance that you are owed if you are laid off declines legally, and because you have no tenure in the organization - you could be the first to go if the company needs to make reductions in staffing.  If you are taking a new job, review your termination clause in your contract and negotiate a reasonable minimum notice period if you can.


What can you do to recession proof your life?  A lot of these apply all the time, but are even more critical in recessionary periods: 


Live within your means by following a budget.

Explore additional income streams to mitigate some of your risk of job loss.

Diversify your investments across many asset classes, geographies and industries.

Protect your credit score.


Stay safe out there my friends, and remember - this too shall pass.


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Much love, gratitude and money xx