How to Prepare for a Recession

A recession is a significant decline in economic activity lasting more than a few months. It is visible in industrial production, employment, real income, and wholesale-retail trade. The US experiences an average of one recession every five to seven years. Most recently, the Great Recession began in December 2007 and ended in June 2009. This was the longest and deepest downturn since the Great Depression.
While no one can predict when the next recession will happen with 100% certainty, we can prepare for it financially. The key is to be proactive rather than reactive. Here are some tips on how to do just that.

Start an emergency fund

If you don’t have one already, now is the time to start an emergency fund. An emergency fund is a stash of cash set aside for unexpected Expenses—think job loss, medical bills, or car repairs. Financial experts recommend saving three to six months’ worth of living expenses. If you can swing it, aim for the higher end of that range.

Build up your credit

Your credit score is a three-digit number that lenders use to assess your creditworthiness—in other words, whether you’re likely to repay a loan on time. A high credit score means you’re a low-risk borrower, which could lead to a lower interest rate on a loan. A low credit score could lead to a higher interest rate and could mean you won’t be approved for a loan at all. So if you don’t have a much-established credit history or your credit has taken a hit due to financial difficulties, now is the time to start rebuilding it.

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Some ways to do that include making all your payments on time, keeping your balances low, and only opening new accounts when absolutely necessary. You should also check your credit report regularly for errors and dispute any that you find. You’re entitled to one free credit report from each of the three major credit bureaus—Experian, TransUnion, and Equifax—every 12 months through AnnualCreditReport.com. Reviewing your report regularly can help you catch mistakes early and identify signs of identity theft.

Save money where you can

Start making changes to your budget now so you can free up extra cash that can be stashed away in savings. Track where you’re spending your money using Mint or YNAB so you have a clear picture of where cuts can be made. Once you have a better idea of where your money is going each month, look for areas where you can trim the Fat—eating out less often, cooking at home more, or downsizing your cable package are all easy ways to save some extra cash each month. Then commit to automatically transferring that money into savings so you’re not tempted to spend it elsewhere—out of sight, out of mind!

Pay down your debt

This will help lower your monthly expenses and free up more cash flow to cover your essentials in the event you lose your job or experience a reduction in income. Start with your high-interest debt first, such as credit card debt, and then tackle your lower-interest debt, such as student loans or a mortgage.

Invest in yourself

Take this time to invest in your education and professional development. If you’ve been thinking about going back to school or getting a certification, now is the time to do it. Not only will this make you more marketable in the event that you lose your job, but it can also lead to career advancement and higher earnings over the long term.

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No one knows when the next recession will hit, but we can prepare for it by following these simple tips: building up an emergency fund; saving money where we can; and checking (and repairing) our credit scores regularly. By being proactive instead of reactive, we can put ourselves in a much better position financially if (or when) another recession comes our way.

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