How to Recession Proof Yourself

Talk of recession is everywhere, but are we actually experiencing one? Janet Yellen, US Treasury Secretary and one Smart Sister, said that the US economy is not in recession since the labor market is so strong. A recession is defined by a significant decline in economic activity spread across the economy affecting income, employment, production, and wholesale-retail sales.

Employment and wages are rising across the board so, if inflation is addressed by the recent interest rate hikes, we may avoid recession. If you are still concerned about growth in the economy or in the particular industry you are in, here are some steps you can take to recession proof yourself:

1) Build a dedicated, safe Emergency Fund

2) Protect your credit score

3) Stay invested

Build An Emergency Fund

Our first tip is to make sure you have a safe, funded emergency account. 

At a minimum, this should have 3 months of your essential expenses (which includes rent, food and job expenses) saved. No, Hulu doesn’t count as an essential expense!

For example, if your rent is $1,000, you spend $500 on food and your car payments and gas are $300, your essential expenses are $1,800. You should aim to have at least $5,400 in an emergency fund. If you are a single parent, are self-employed, or have a partner who is self-employed, we recommend that you have closer to six months of essential expenses saved.

While this feels like a big goal, start with one month of emergency cash and keep at it. Any time you can avoid paying for an unexpected expense with a credit card or some kind of loan strengthens your financial future..

We also recommend your account be “safe”. Ideally it would be separated from the account where you pay for regular expenses like rent and groceries so that it is a little harder to access for a spontaneous purchase. Keeping your emergency cash in a high-yield savings account like those offered at Marcus or Capital One 360 will also help you make a little bit more interest while you recession proof yourself.

If you don’t know how to calculate your essential expenses, here’s the Smart Sister Finance spend tracker you can download to start recording your monthly expenses and building that emergency cash.

Protect Your Credit Score

Even in a downturn and when things are uncertain, we encourage you to keep making regular debt payments to protect your credit score.

Your payment history is the biggest factor in your credit score and skipped, late or partial payments all have a negative effect. On-time payments make up 35% of your overall credit score and missed or partial payments negatively affect your credit score for 7 years. Maintaining your credit score ensures access to better lending rates, higher-quality rentals and future loans for personal or business needs.

Keep up with what you owe on a car loan, student loans or even a mortgage. If you are going to miss a month, or need to make a partial payment, communicate with your lenders as soon as possible. If you have been paying consistently up until then, it is far more likely that you will get a forbearance or a rate change from your lender when you need it.

Stay Invested

The most important thing you can do to secure your financial future is leave your investments alone during a downturn. No one can time the stock market and it tends to fall and recover in an uneven way that is hard to predict. If you are holding onto cash waiting to get back in, and you miss even one big day of recovery, your gains will be on average 46% lower one year later than an investor who stuck with her investments. This gap widens to 83% over three years if you sell your investments in a downturn. 

We at Smart Sister Finance encourage you to choose quality investments with low fees that can weather the ups and downs of the market. Through Smart Sister Finance coaching and classes, you can learn about different investment options and make informed choices for your retirement account and any other investments you have.

If you are nervous about the market, don’t look at it. Don’t cash out your investments.

Even if a recession does not happen this year, contractions are a regular part of the economic cycle, so preparing for them is always worthwhile. By following the tips above you will be more resilient for 2022 and better prepared for the next - inevitable - downturn.

Join us - financial knowledge will help you recession proof yourself!