We’ve experienced two of the worst recessions in recent history during In the last decade.
The Great Recession hit us hard, and we’re still recovering from it. The global economy is facing a recession again and you don’t want to get caught off guard.
You need to be prepared for what may come next and protect your money from any potential fallout.
Here are some steps you can take now.
Stable sources of income protect against recession
Stable sources of income are the best way to protect your money from a recession. This is much more important than trying to predict when a recession will occur.
Rather than looking for income that is dependent on the economy (like stocks or bonds). Look for sources of income that aren’t so easily affected by economic ups and downs. For example:
- Real estate rentals: if you own property, this can be an excellent long-term investment. You’ll get monthly rent checks. The stable rental income will help pay off any loans you took out in order to buy the property and support maintenance expenses.
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Online jobs: You could start earning money online by freelancing. Another good idea creating your own products/services. These can be sold on websites like eBay, Amazone or Etsy. This option may require some technical skills but it’s easy enough even if you’re just starting out!
Increase your emergency savings to stay safe during a recession
It’s important to have an emergency fund that can help you avoid turning to credit cards for money in emergencies.
Having a good chunk of cash stashed away in a safe place is your best defence against having to rack up debt during tough times.
- How much should I save? The amount varies, but one good rule of thumb is that your emergency fund should be enough to cover 3–6 months’ worth of living expenses.
- Where should I keep it? Ideally, you’ll be able to invest it safely and guarantee full liquidity if needed. A savings account is fine if they’re available at all banks near where you live.
Consider reallocating or diversifying your investments to face the recession
When it comes to protecting your money in a recession, diversifying your investments is key.
Don’t put all of your eggs in one basket. What does this mean?
Don’t put all of your money in the stock market, the bank, real estate or even your business. Instead, invest in a variety of assets that will help you weather any storms and bounce back after they’ve passed by.
Diversification also helps when it comes to managing risk. A concept that’s often used synonymously with volatility but isn’t exactly the same thing (more on this later).
When used appropriately and successfully, diversification can reduce overall risk while still allowing an investor to take advantage of attractive opportunities as they arise.
Have a plan for paying down debt, especially high-interest ones.
The first step to protecting your money from a recession is to pay down high-interest debt.
Credit card debt is the biggest culprit here. Don’t get me wrong; you should pay off all of your debts, but if you only have one or two debts and one of them is at a higher interest rate than another, it’s best to start with the higher interest rate.
If you’re not sure which debt has the highest interest rate, look at your recent credit card statements or call up each credit card company and ask them what their current annual percentage rate (APR) is on each card.
Once you’ve determined which loan has the highest APR, put as much extra money toward paying off that debt as possible until it’s gone. Then move on to the next-highest APR loan until they all disappear!
Be cautious of tax-free income
Just because your income is tax-free doesn’t mean it’s necessarily better than taxable income.
In fact, the opposite can be true in some cases: tax-free income can be less stable, more volatile, and riskier than taxable income.
For example, if you’re receiving interest payments on a bond or CD (certificate of deposit), those payments aren’t subject to any taxes.
However, if the market takes a nose dive right when you get your payment. This means that your investment lost value.
Then even though you didn’t pay any taxes on that money while it was growing in value, when it comes time to cash out and actually use that capital for something else, it may not be worth as much as expected due to market volatility.
Understand the risks and act accordingly
It’s easy to panic when the economy takes a turn for the worse, especially if you’ve been following it closely and feel like you have a good sense of what’s going on.
But remember: understanding risk is key; panicking just makes things worse.
When an economic downturn happens, there are things that can help protect your money. It starts with understanding what risks exist in your portfolio and how they might affect its value.
That way, you can act accordingly—rather than reacting emotionally or impulsively—when something happens that could impact your finances negatively (like the stock market taking a dive).
The Bottom Line
It’s never fun to think about what could happen in the future—especially when it comes to your finances.
But as we discussed, there are ways you can protect yourself against economic downturns. Start by diversifying your investments and paying down high-interest debt. Then, in the event that a recession does hit, you’ll be more prepared than ever before!
Talk to a financial advisor if you need help with any of these steps.
