Thanks to rampant inflation and a slowing economy, Americans have had to dip into their savings more than usual lately. A survey by Achieve earlier this year found that 35% of consumers are planning on spending, or have already had to spend, cash from their emergency fund.
“When we hear forecasts on the news that talk about potential downturns in the economy or signal recessions, it can be scary,” said Kendall Meade, a CFP with SoFi. “There are steps you can take to improve your financial health and prepare your finances for any economic time, helping you sleep at night.”
So if you’re worried about recession-proofing your finances — just in case — here’s what you can do.
Make Sure You Have a Budget in Place
“The easiest way to deplete savings is by not knowing exactly what you have coming in and going out,” said Andrew Housser, co-CEO and co-founder of Achieve. That’s why it’s important to have a basic budget in place, which you can put together using an app, spreadsheet, online program or even pencil and paper — whatever works for you.
Housser added that it can be a helpful exercise to track all of your spending for a couple weeks to see where your money really goes. “You may be surprised,” he said. Then you can decide where to make adjustments in your budget to cut unnecessary spending and ramp up savings.
Beef Up Your Emergency Fund
First, make sure you actually have savings set aside that you can rely on in the face of a financial emergency. “This can help you get through tough times without having to rack up high-interest-rate debt,” Meade said.
Experts recommend an emergency savings fund of at least three to six months’ worth of expenses. So if you don’t have one yet, that’s a good target to start with. However, you might want to aim for nine months or more for added security.
Additionally, Meade said it’s important to make sure your emergency fund is safe and accessible. “Many people are tempted to invest their emergency fund, but this can be a big mistake,” she explained. Instead, keep the money in a checking or savings account.
Pay Down High-Interest Debt
Meade said paying down high-interest debt should be a top priority, regardless of where we are in an economic cycle. However, it’s particularly important in times of high inflation and potential economic downturns.
“One of the costliest pieces of our budget can be high-interest debt payments, so by lowering and eliminating these debts, we can free up cash flow in our budgets, allowing some breathing room,” she said. “Once you have been able to eliminate this debt and lower your monthly expenses, this will allow you to put more money away for an emergency fund.”
Generate Additional Income
No matter how carefully you track expenses and monitor your budget, there is a limit to how many expenses one can cut, Housser said. To increase your savings and financial security, it can help to look for ways to earn more income.
“Working extra hours is not for everyone, and can be difficult, but it’s an excellent way to generate extra cash to ensure you do not deplete savings,” Housser said. “There are plenty of opportunities for side gigs, such as tutoring, doing yard work, offering pet services, babysitting or providing other services you have talent for.”
Finally, resist the urge to make radical changes to your investments when the market is experiencing a downturn.
“While a plunge in the stock market can be scary, it is important to make sure that we don’t let short-term market fluctuation impact our long-term investing goals,” Meade said. “The best thing to do — regardless of current market conditions — is to make a plan, get invested and stay invested over the long-term.” She added that a recession can even be a great opportunity to buy assets at a discount and employ tax loss harvesting strategies.
More From GOBankingRates