Six tips to be financially prepared in case of a recession

What is a recession?

It’s on everyone’s lips these days: recession. But what exactly does this mean? In theory, a recession is a decline in economic activity for at least two consecutive quarters.

In reality, a recession often leads to an increase in the unemployment rate, loss of income and as a result, decreased purchasing power and the risk of greater inequalities. Business growth slows down, some might even go bankrupt. Households buy less. It triggers a vicious circle as production then restarts only very slowly. Even though a recession usually only lasts a few months, it can have a long-term impact on our finances and our lives.

Fortunately, there are steps you can take to get through this period of uncertainty and instability as smoothly as possible.

1. Review your budget

To prepare you for the tougher months ahead, you should review your budget more often than usual. Rising interest rates will inevitably lead to a decrease in your purchasing power. In other words, everything will cost more (actually, it already does, but it will get worse). So, you need to cut your expenses as much as possible now to be able stay within your budget. Furthermore, since companies are having a tough time during this period, you should not expect to receive any salary increases or bonuses.

2. Reduce your debt

Make a list of all of your debts (credit cards, student loans, car loan, bank loans and personal loans, etc.) to get a better view of your situation. Focus on paying off short-term, high-interest debts such as credit cards, overdue bills and loans. You’ll get out of debt faster and pay less interest.

3. Postpone major and non-essential expenses

When the economy is going well, we often let ourselves be tempted and buy things that we don’t really need. In times of instability, it’s best to avoid this kind of behaviour. Make do with what you have and resist the urge to buy.

For example, if you had planned on renovating your bathroom, postpone this project. It’s also not the time to buy a new house or a new car because the interest rates risk being much higher than in recent years.

4. Create a safety cushion

No one is immune to the unexpected. Especially in times of economic recession. The best thing to do to prepare is to create an emergency fund. If ever you had a temporary drop in income, you could survive for a few months before finding another job.

Naturally, at all costs, you must avoid using your credit card as an emergency fund because you could go into debt due to its high interest rate.

When making your budget, see how much you can set aside each week, even if it’s just a small amount. Schedule automatic transfers from your chequing account to a savings account, this way, you won’t have time to spend any money that week. If your financial situation improves, you can progressively increase the savings amount.

5. Make sure your debt ratio does not exceed 35%

For your financial situation to be viable, you must be able to repay your debts. If your debts are greater than your ability to repay them, you are overextended. Your situation then becomes problematic. It is possible to calculate your income/debt ratio. Experts recommend this ratio be below 35%. To help you, use our debt ratio calculator.

6. Talk to your financial advisor if you have investments

During a recession, returns on mutual funds, index funds and stocks can fluctuate drastically or drop sharply. If you are concerned, make an appointment with your financial advisor. However, usually, if your portfolio is balanced, you don’t have to do anything but wait out the storm. Studies show that these funds eventually recover and return to a good performance after the economic crises that caused the financial markets to fall.

In conclusion, while the idea of a recession is alarming, being well prepared will help you cope. The key is to live within your means. Also keep in mind that recessions usually only last a few months. The economy always recovers eventually. So, there is hope at the end of the tunnel!

Have you accumulated debt and don’t know how to prepare for the recession? Don’t hesitate to contact one of our financial recovery consultants. They will help you find solutions.