Not to be too alarming, but the economy is not looking great right now. For starters, don’t look at your 401(k) straight away. From crashing stock markets until rising consumer prices† a recession seems to be threatening† While the news is disturbing, there are steps you can take to avoid panic and protect yourself as best you can during a recession†
I spoke with personal finance expert Jen Smith, co-host of @frugalfriendspodcast and modernfrugality on Instagramwho shared her top tips for what to do now to prepare for the economic conditions that are just around the corner.
Start by looking at your spending habits
Smith says to at least investigate the latter 90 days of your spending to see exactly where your money is going. When it comes to the idea of ’austerity’, many people panic and assume that their way of life will have to change radically. Smith says this is a fear response and often isn’t the case. “The first thing you think you need to cut,” like your daily coffee or your weekly happy hour, “can usually be the last thing you go.” Smith shares that most people, after looking at their spending habits, find that they can first cut corners in areas they don’t even realize are wasting their money (overlooked subscriptions comes to mind).
During a recession, your means of increasing your income—wage increases, promotions, and sideline activities—will be: limited. So while it may seem ideal to bring in more money, Smith says that to get through temporary tough times, “focusing on economizing is more important than increasing your income.”
Tackle high-yield debt first
Smith outlines two main approaches to dealing with debt: the debt snowball, and the debt avalanche. The goals of the snowball method your smallest debt first, regardless of the interest, while the avalanche gives priority debt with the highest interest rates† Smith recommends preparing for an impending recession through a debt avalanche.
As mentioned above, your income is not so safe during a recession. Compared to the gradual debt snowball, the avalanche method is your go-to during recession-induced survival mode.
To use the debt avalanche strategy, Nerd Wallet recommends adding up all the minimums you have to pay on your debt (excluding your mortgage). Order them from the highest interest rate to the lowest; Smith says interest rates above 5-7% should be your priority. Then, Make a budget to determine the maximum amount you can afford to pay off your debt each month.
Start building a rainy day fund
It’s never too early to contribute to a “rainy day”, which can more accurately be renamed a “rainy day” during a recession.emergency fund.”
You want to create a “start-up” emergency fund, but as those reserves grow, Smith says it’s probably a higher priority to deal with your high-interest debt first. A possible guideline for what counts as a ‘starters’ rainy day fund is about a month’s rent plus your insurance deductible. After you reach that amount, refocus on paying off high-interest debt. Then you can build up an emergency fund again that can cover you for six months or longer.
Listen to your fears, but don’t live in them
Recessions make everything uncertain. However, it is in your best interest to keep a cool head. “When we live in fear, we make worse financial decisions,” Smith says. While it is important to take the above precautions, it is unwise to let fear rule your life.
Jen Smith can find you on Instagram and listen to The frugal friends podcast wherever you listen to podcasts.