The Panic-Free Guide to Recession-Proofing Your Finances
How to

The Panic-Free Guide to Recession-Proofing Your Finances

You’ve seen the headlines. You’ve watched the TikToks. You’ve read the advice columns. A recession is on the horizon, and if you’re like us, you’re probably feeling extra anxious about what economic uncertainty means for your career and your bank account. Fortunately, we’ve covered the former already, and today, we’re talking about how to recession-proof your finances. Does this mean you should start making coffee at home and stop your weekly takeout sushi? Spoiler alert: No (thank gosh). Should you wait to splurge on that big purchase? Is this a bad time to invest in stocks and real estate? Whatever’s keeping you up at night when it comes to your money situ, we asked two experts to help you navigate this tricky time.

The Experts

Katie Gatti, a personal finance blogger, podcaster and the founder of Money with Katie

Nika Farb, a personal finance expert and host of the podcast Miss Findependent

How can I financially prepare for a recession?

First, determine if you need to be on the offense or on the defense when it comes to your finances, says Gatti. So, what does this mean exactly? If you’re on the offense, it means that “you’re doing well at work, you’re keeping your LinkedIn up to date, you have a solid cash cushion of like three to six months of expenses available to you and you are already investing regularly,” says Gatti. All of that financial planning in the “good” times has meant that during these “down” times, there’s not much that you need to change. Now is a great time to start looking for opportunities to grow your financial portfolio and make some long-term investments (more on that later).

But say, you haven’t had your financial awakening yet and you’re still living paycheck to paycheck with little-to-no savings. You should probably go on the defense which means being stricter about your personal spending and cash flow. This can be divided into three categories: your income, the big stuff and the little stuff, according to Gatti. Let’s take a closer look:

  • Your income: How are you earning money? How many streams of income do you have? If you have one stream of income, is there a side hustle you could take on? If you have a side hustle, how can you scale it in case you lose your main source of income?

“Some people don't really have spending problems, they have an earning problem,” says Gatti. “They’re just not being paid enough.” The median salary in the US is $60,000, and if you’re earning significantly less than that, it’ll be difficult to afford the cost of living in most cities. “Rather than trying to cut back on subscriptions or coffee, it's actually worthwhile to spend that time and energy looking for additional work, or changing companies or industries to try to get over that median benchmark,” she adds.

  • The big things: This is your rent, car payments, credit card debt, insurance, phone bill—basically anything that doesn’t change month-to-month. Your expenses shouldn’t exceed 28 percent to 30 percent of your monthly take-home pay. Transportation costs (like gas, maintenance and insurance) should be less than 10 percent. If it’s more than that, then you’ll likely feel financially squeezed. “It doesn't matter how many lattes you cut out, if your rent costs 50 percent of your monthly paycheck, you're always going to feel strapped,” says Gatti.

  • The little things: When it comes to budgeting, our first thought is usually, “I’ll stop eating out. I won’t buy any new clothes this month. I’ll make all of my coffee at home.” But the reality is, other factors are to blame—like wage stagnation, inflation, and the rising costs of housing, education, childcare and healthcare—than your discretionary spending. But “if you find that your income is sufficient for where you live, and your big stuff is locked and loaded yet you still feel like a victim of fraud every single time you get your credit card statement, chances are you have got some spending holes to plug,” says Gatti.

When in doubt, document everything—yes, everything—that you spend in a month. It can literally be in your Notes app or in an old journal. Every time you spend money, you record the amount and the category. Before you tally everything up at the end of the month, estimate how much you think you spent in each category—eating out, shopping, groceries—then actually add it up and compare. “I find this to be really eye opening,” says Gatti. “When you’re trying to get your financial shit together, this is usually the lowest effort way to start identifying where we might be going off the rails.”

Assessing your financial situation, strategically identifying where the strain is coming from and making changes is exactly how you go on the defense during a recession.

Now, if you identify as being more on the offense of your finances, here’s how you can take advantage of a looming recession. Stocks, real estate and other assets tend to be underpriced during these time periods. Once you’ve got your personal cash flow figured out (“If you have $500 in your savings account, and $10,000 of credit card debt, this is not the time to go become a real estate investor,” says Gatti), ask yourself: Can I invest more aggressively in the market? Can I snap up a piece of cheap real estate? Can I start a new venture?

Other silver linings? Some banks and brokerage firms are offering higher interest rates with up to four percent APR (annual percentage rate), so it might be a good idea to shop around and find a better spot to stick your emergency savings. “Now is actually the best time to start investing more aggressively,” says Gatti, “because you are benefiting from buying more shares for lower prices, your dollar is going further in the stock market.”

Think of the stock market like a crystal ball for the real economy—that’s why people are talking about a recession in 2023… not now. The stock market is usually six months ahead, so if we’re in a recession, the stock market is likely in a better place and it’s a good time to keep building your stock portfolio.

TLDR: Recessions are a totally normal part of the business cycle—they're not necessarily anything to be scared of. You have more control over your finances (and your mindset) than you think you do.

I heard about “unbudgeting.” Is that something I should be doing?

Some people love the structure of a super-detailed budget tracker and for others, that kind of strict self-control makes them anxious and overwhelmed. If you fall into the latter category, you don’t need to put spending caps on every aspect of your life (go ahead and have your daily $7 latte)… as long as it doesn’t become a problem. “There are certainly instances where we lead into avoidant tendencies as a defense mechanism,” says Gatti. If you’re feeling avoidant, shame, guilt or frustration when it comes to your money, it’s important to acknowledge that and work towards a budgeting plan that you can stick to, no matter the state of the economy.

“Removing a blueprint is like saying it’s okay if you go rogue,” adds Farb. “Sure, some people might thrive in uncertainty, and figure it out as they go, but others need more control. They need a map or blueprint to follow.”

TLDR: Budgets are used for a reason—they help you stay disciplined and are a blueprint to help you achieve your financial goals.

What are some easy ways to save money? Will making coffee at home really make a difference?

Let’s do some quick math, shall we? Making coffee at home will at most save you  approximately $180 per month or $2,160 per year. In comparison to the largest spending categories (convenience, dining and online shopping), these numbers are miniscule.

So, good news: your coffee addiction is safe. However, Farb has other (more effective) ways to start saving money, now:

  • Unsubscribe from marketing emails so you're not tempted to shop and buy unnecessary things. 
  • Skip instagram ads and click the top right corner to ‘hide’ them so you’re not re-targeted. 
  • Try to build a solid habit of grocery shopping once a week and always stock staples so you’re not tempted to order in. Delivery fees for food-apps add up so fast. 
  • Communicate your money saving mindset with friends—chances are they could benefit from some extra cash in their pocket with rising inflation.
  • Get your friends together for a monthly potluck style dinner instead of going out. Bring glass containers with you so everyone can pack some leftovers home.

“Focus on cutting back in those three categories and you’ll be well on your way to building strong financial habits,” says Farb. Adds Gatti: “There's no need to cut back on brunch, if your rent is the real problem. There's no reason to take out the little joys of life.”

TLDR: You and your iced vanilla matcha latte from your neighborhood café are safe.

I’ve been wanting to splurge on a big purchase. Should I wait for more secure financial times?

Say, you’ve had your eye on a new Bottega Veneta bag, or an all-inclusive trip to Bora Bora. What? Times have been extra tough lately, and you’re not going to let a looming recession stop you from treating yourself to some well-deserved goodies. But, before you whip out your credit card and click “checkout,” consider the one-week rule. “Chances are, if you’re considering splurging, it’s because this product or service has been marketed to you—either by someone you know, or social media,” says Farb. “Add it to cart, but think about if it will improve your quality of life in any way. How will it make you feel having this item/service in your life?” 

If after a week, you still can’t stop thinking about it and you’re in a financial position to buy it (ie. it won’t set you back on your $$$ goals—see question #1), then go for it, advises Farb.

TLDR: Recession or no recession, if it’ll improve your quality of life and you can afford it, there’s nothing that should stop you from purchasing.

Does a recession always have to be seen as a negative thing for our finances?

A recession is a great opportunity to go back to financial basics, according to Gatti. “There is a beautiful simplicity in scaling back and reassessing what your values are.” Where are you getting the most value from the money that you’re spending? And how can you reclaim the financial narrative of your own life? “Instead of letting the media cycle get in your head and make you feel like the world is ending, statistically speaking, it’s not actually going to impact you that much,” says Gatti. “How can you make the best of a time that might feel scary and negative?” For many people, a recession is an opportunity for growth—not a threat.

“If you have current investments and a long-term outlook, your goal shouldn’t be to sell when prices are low,” says Farb. “During a recession, the best thing to do is to continue to consistently invest. Even when the economy is on shaky ground, you can insulate yourself by investing in companies that consumers are still going to spend money on, like healthcare, utilities, consumer sector goods, household items, electricity. Plus, investing in dividend stocks (look for companies with a low debt-to-equity ratio) can be a great way to generate passive income. If you’re investing for the long term, make sure you re-invest those dividends instead of taking profits.”

TLDR: There’s no need to panic. Once you have a healthy emergency fund, you can look towards long-term investing, and an economic downturn is a great time to build wealth.

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