Regardless of what the future holds, there will always be economic booms and busts.
The good news is the best financial strategies apply regardless of whether or not we are entering a recession. It’s always a good time to pay down debt, build your emergency fund, and develop skills that can lead to a more lucrative career.
“A lot of the advice that I would normally give applies for this time as well as it does other times,” says Sophia Bera Daigle, CFP and founder of Gen Y Planning, a financial planning firm. “Focus less on what’s going on in the actual economy and more of what’s going on in your own personal economy.”
As you consider the best way for you to navigate economic uncertainty, here are foundational principles to put your finances on solid footing.
How to Prepare for a Recession
The word “recession” can drive up your anxiety a notch or two, but it may not be as scary as it seems. The definition of a recession is negative economic growth (as measured by the gross domestic product or GDP) for two consecutive quarters, which is six months.
Since World War II, recessions have lasted an average of around 11 months. By the time a recession is officially announced we’ve already been in it for six months, says Emily Liou, founder and career coach at Cultivitae. “So it’s about weathering the storm for another five to six months.”
Make a Financial Plan
Knowing what your income and expenses are and having a clear plan for the money you’re making can help alleviate financial stress. Budgeting can help you adjust your spending habits and prioritize your goals.
Have a plan to help you avoid taking on excessive debt or to pay off your existing debt. But you don’t need to only focus on paying off debt or building your savings, you can also be investing for the future at the same time. “I think it’s a really great time to keep saving for retirement, the stock market is down and stocks are on sale,” Bera Daigle says.
You’ll also want to have a plan in place for when your income or expenses change unexpectedly. This is an especially important conversation to have with other people in your life you are financially responsible for. If you have a partner, you may both have different opinions on how to attack your finances, says Sahirenys Pierce, founder of the personal finance site Poised Finance. “It’s really important to start brainstorming and thinking about what options I have financially, if I am going to be touched by a recession or difficult time.” Knowing in advance what expenses you can reduce or eliminate can make tough decisions a bit easier.
Build an Emergency Fund
Having money set aside for emergencies or to cover a job loss is an important part of setting yourself up to successfully navigate uncertainties. Save up at least three months of net pay for emergencies, says Bera Daigle.
Although experts differ on their opinion of how much you should have in an emergency fund, it is a vital tool for navigating a job loss, medical bills, or expensive vehicle repairs. Once you’ve built up an emergency fund, it’s okay to use it.
It can be really difficult for people to pull money from their emergency fund, Pierce says. It can feel like a daunting task to have to replenish your emergency savings. “But we also have to remind ourselves that this is a natural part of our finances,” says Pierce, who recently had to dip into her emergency fund for a family emergency.
Develop Your Career
When it comes to recession proofing your career it’s better to be proactive not reactive. “One of the best things that we can do is … take control of what is within our control,” Liou says. I believe in planting seeds today, so that when you need something you’re not starting from scratch, she says.
Begin preparing your resume, LinkedIn profile, and growing your professional network now. Always work on developing your professional skills and experience because “good people get hired,” Liou says. Even in a recession certain industries or companies can thrive.
To identify what companies are growing, look for those that are hiring job recruiters, Liou says. “The companies that are hiring [recruiters] are not hiring recruiters because they’re laying off people … they’re looking for more talent,” she says. “The truth of the matter is, we always have opportunities, even in the worst of times.”
To find companies that are thriving, look for job recruiter openings because companies that are hiring recruiters are growing.
Approach your career with the goal of constantly evolving and growing. Liou’s rule of thumb is to aim for jobs where you meet 70% of the job description. That other 30% gives you a chance to learn new skills and to grow. When you meet all of the job requirements, it could be seen as a red flag, Liou says. You could be viewed as overqualified and the translation to a hiring manager is this person’s gonna get bored, this person won’t feel challenged, she says.
Expand Your Income Sources
Consider addressing budget constraints or boosting your savings rate by finding creative ways to make extra money. Cutting expenses isn’t fun, it’s not a great way to motivate people, Bera Daigle says. If someone can generate an extra $5,000 to $10,000 a year to invest, seeing that impact “is more motivating to people,” she says. “You’d be surprised how creative people can get when it comes to that type of thing.”
You can add a level of stability to your finances by diversifying where you earn your income. Building a side hustle, freelancing, or working a part-time job could all add extra security to your budget. “Entrepreneurship is the new job security for our generation,” Bera Daigle says.