No one likes to think about recessions. They can range from unsettling to completely terrifying depending on your financial and job situation. But even if we don’t like them, they are predictable. On average, we have had a recession about every 6 years, which means that we are getting overdue for the next one. And while none of us is looking forward to one, there are several things we can do to make sure that we are on the mildly-concerned side of the spectrum instead of the full-on panic side of the spectrum.
Create an emergency fund
The most important thing that will help the average person weather a recession is to create an emergency fund. However, an astonishing number of people don’t have any money in savings at all. Not a great thing if we’re staring a recession in the face. So the first thing to do is get something in savings.
Many experts recommend an emergency fund of 3-6 months of expenses, although some recommend one as large as 12 months’ worth of expenses. The problem is that it can take significant time to save that much money, and if you aren’t paying off debt, you are sitting on a mountain of cash that you might not even need. At the same time, you may be paying huge amounts of interest each month that will make saving anything at all that much harder.
Finding the right balance
One way around this Catch-22 is to set a certain amount for a starter emergency fund, and then switch to paying off debt. When all debt is covered, then you switch back and finish up the emergency fund. For me, I would have a lot of trouble sleeping at night if I didn’t have at least one month’s worth of expenses saved up. So maybe the logical thing to do is to focus on saving a one-month emergency fund, then paying off a portion of debt, then saving another month, and so on.
If you have read my series on Dave Ramsey’s Baby Steps, you’ll realize that this is contradicting his advice to save only $1000 and then pay off ALL debt before finishing the emergency fund. But there is a reason I don’t like that advice at this exact point in time. We are overdue for a recession. Nobody can predict the future of the financial markets. But it makes me really nervous not to have a little bit of extra money laid aside when a recession – and possibly a big one – is looming.
Pay off debt
OK, so you have decided to get an emergency fund saved up. And you’ve chosen an amount to start with, one that’s enough to let you sleep at night, but not take 6 months to save up. Now it’s time to kick the debt pay off into high gear. For this, definitely start with your smallest debt. Why? Because every debt that you pay off is one less payment you’ll have if you get laid off. Even a reduction of $50/month in minimum payments can reduce the stress and make the emergency fund go a little further.
So this is what you do. Make minimum payments on everything but your smallest debt, and pound that sucker. Pay it off as quickly as you possibly can. Don’t eat out. Don’t splurge. Don’t buy ANY new clothes. Put every extra penny toward paying off that first debt. When the littlest debt is paid off, take that minimum payment, add it to the payment on the 2nd littlest, and pound that one.
You might not get all your debts paid off before a recession hits. However, you’ll be in a much better position if you have an emergency fund (even a small one) and have started paying off debts.
Once you’ve paid off a few debts, you might want to re-assess. Does your job seem stable, or is there trouble on the horizon? If it seems stable, you might want to stay the course. But if there is talk of a RIF at work, or if your partner’s job seems shaky, you might want to increase the emergency fund a little more before you pay off any more debt.
Create a side hustle – or two
This one goes hand in hand with the others and will help them to go a lot faster if you do it right. Start a side hustle or a small business to amp up your income. That gives you more money to put toward your emergency fund or your debt. The important thing here is not to spend too much money setting it up.
And the good news is that there are a lot of side hustles you can get going fast with very little investment. Here is a list of “high-dollar” side hustles – side hustles that allow you to make $20 or more an hour. If you’d like to get the real scoop on VIPKID, you can check out my interview with a friend of mine here. She’s been doing VIPKID for almost a year and it really works for her. Shoot, for a month or two, you could just deliver pizzas or babysit. But if you are serious, get out there and do something to earn cash and speed up the rest of the plan.
If you can earn an extra $300-$400/month, everything else is going to go a TON faster. You’ll build your emergency fund faster and pay off debt faster, too.
There is one SUPER important thing to remember here, though. Any money you make from a side hustle might not have taxes withheld, especially if it is a small business you start on your own. Make sure to put about 25% of that money back so Uncle Sam doesn’t surprise you with a big tax bill next April.
Update your skills
If you feel like your job isn’t as secure as you’d like it to be, updating your skills might be a higher priority than a side hustle. Now, I love extra money coming in. But what if you are worried that your company isn’t doing so well or that you might be one of the first to go in case of a downturn? Getting a few new skills under your belt might be more important than immediate income. Focus on skills that would make you more valuable in your current job or more marketable if you needed to go job hunting. Computer skills are always a good bet, but if you are almost proficient in a foreign language, that might be a good choice, too.
Again, spending an arm and a leg isn’t ideal. But you can get an absolute TON of learning for free online. Check out this list of the 10 best sites for FREE learning. Or this one for specific IT courses.
Check your monthly bills
Besides earning more money with a side hustle, you can also cut your monthly bills to find more money. In case of a recession, it will help to have lower monthly expenses. And in the mean time, you will have extra money extra month to put toward your emergency fund or toward debt.
It seems totally overwhelming and a lot of people don’t know where to start. But I’ve got a plan. Start by assembling all of your monthly bills and statements. Check your statements to find subscriptions or monthly charges you might have forgotten about. Then start calling. If you can cancel the charge (like with a gym membership you rarely use), do it. But if you can’t cancel it, see if you can get the charges reduced. If you get even three bills cut by $15/month, that adds up to $45/month total.
Choose and implement 1 new frugal habit
One of the things that trips a lot of us up when we want to reduce spending is feeling like we have to reign it all in at once. We rush in, slash like crazy, and then give it up after a week and a half because it’s just too overwhelming.
Let’s not do that, K? Instead, pick one item, JUST ONE in which you could make some cuts. Then create a plan. Do you buy coffee at the Starbucks near your office every morning? Could you cut it to just one morning a week? Depending on your order, that alone could save you $60-80/month. How many times a week do you eat out? Reduce it by one, just ONE per week and stash that money.
Again, I’m sure you have a LOT more ways you could cut expenses, but pace yourself. This ain’t no sprint. It’s a marathon, Honey! Give yourself time to really solidify one frugal habit before you rush into another one. My suggestion would be to aim for no more than one new money-saving habit every 2-4 weeks. You want it to become so routine that it doesn’t takes almost no willpower at all to continue it. That way, when you add another habit, the first one doesn’t shrivel up and die.
So if a recession does come our way (and it WILL, the question is only “when?”) you’ll sleep so much better at night if you’ve put yourself on solid ground with even one of these tips. Don’t overwhelm yourself by trying to do all of them at once. Think about what is realistic for you, do that, and then pat yourself on the back.
You got this!