The stock market entered bear market territory, inflation is high, and many experts are suggesting a recession is coming. You may be thinking about what smart money moves you can make now to prepare for a recession.
There are four categories to be considering to be as ready as you can be: 1) building short-term / emergency savings; 2) corralling high interest debt; 3) timing to make upcoming big purchases, 4) saving for retirement.
1. Take Care of Short-Term Saving Goals & Earn Interest on Your Money
When recessionary times look like they are on the horizon, ensuring you're prepared can help make it more of a bump in the road than a canyon. For short-term monies, try to ensure you at least have $1K-$2K readily available for unexpected expenses or emergencies. The real goal is to have 3 to 6 months of salary in a high interest rate savings account. That way if you’re impacted by “downsizing” that often occur during a recession, you have time to find that next gig without all the financial stress.
Make sure you didn’t miss that “high interest rate” savings account mention above. With interest rates on the rise, many banks only offer minimal interest on your money while others are 3% or more. Higher interest can really add up. If you’ve saved three or more months of salary, earning high interest can mean hundreds if not thousands more in money each year. Do a quick search online for high interest rate savings accounts and see if your savings account stacks up. If not, open a high interest rate savings account and move your money in!
2. Pay Down or Put a Dent in High Interest Debt
You may have credit card debt or a floating loan or line of credit. With interest rates rising, the amount you owe will increase on these kinds of loans unless you are paying them down aggressively. You may want to shop around for loan or card with lower interest rates. Other smart moves can be paying off the credit card with a line of credit that has lower interest rates if this is available to you. For more information on managing debt, give this a read.
3. Hold off a Bit on Big Purchases
You may be saving for a car, house, or other big-ticket item. In recessions, the demand for these big items tend to lower the price. So, waiting until the recession hits can be a great time to buy if you have a significant amount saved for the purchase. However, for an item like a house, the mortgage rates may be higher than they are today, so you will need to balance the drop in price of a home with how much is affordable to pay for your mortgage each month. As a rule of thumb, your mortgage payment should not exceed 28% of your income.
4. Keep Saving for Retirement
Most of us are many years from retirement. When markets drop, we buy more shares in our 401(k) holdings which can help drive a bigger nest egg later when markets recover. This can be a great win. For more info on how this works, check this out.
For more on budgeting, this blog provides some insights.