Personal Finance

4 Steps to Recession-Proof Your Finances

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The COVID-19 pandemic caused most states to issue stay-at-home orders in the spring, closing many workplaces around the country – and some of those same restrictions are in place again. The resulting job losses so far have left millions of people without a paycheck and without health coverage. As of June 2020, 7.7 million workers had lost their jobs. Lost employer-sponsored health plans covered 14.6 million people, including 6.9 million dependents.

By November 2020, the number of jobs lost during the pandemic had reached 10.7 million.

Job disruption is strongly linked to financial strain – are your finances healthy enough to keep you afloat if you were to lose your job? In this article, we’ll offer information that will help you recession-proof your finances in four easy steps, so you can be prepared for the unexpected during these unpredictable times.

Keep a Sizable Emergency Fund

There is no better way to position yourself to be resilient, no matter what the economy looks like, than to have a good-sized emergency fund. Job losses, medical bills, and other emergencies hit especially hard during a recession. Generally, a “healthy” emergency fund is one that holds three to six months of living expenses. However, given how long the COVID-19 pandemic has lingered, it’s recommended that you aim to have six to twelve months of living expenses saved for emergencies.

Establish a Strong Professional Network

Gone are the days when job openings were printed in the local papers or posted online; in fact, according to CNBC, up to 70% of jobs are not published publicly. Instead, up to 80% of jobs are filled through professional and personal connections.

Should you lose your job, your network will be your best bet for finding your next opportunity. Building a strong professional network takes time, and it must be done while you are employed. Keep in contact with colleagues while you do have a job! Send Christmas cards, write occasional “just checking in to say ‘hi’” emails, and every so often, send out updates on your own job or volunteer activities.

Obtain an Additional Source of Income

Most Americans have a single job to support their entire livelihood – which can be risky. Should you lose your job, your livelihood would be in serious jeopardy. To mitigate this risk, you may want to secure a second income. This doesn’t necessarily require you to work another full-time job, but if you have a hobby or other interest, consider finding ways to earn an income from it.

For example, if you’re passionate about old houses or history, maybe you can start flipping homes – buying them on the cheap, renovating them, then selling at a price high enough to recoup your costs and gain profit. If you’re on social media frequently, consider becoming a part-time social media manager for a small business. Love taking photos? Why not start a little side business doing family or wedding photography?

While a part-time side job won’t completely fill the void that losing your main job creates, it will soften the blow. Take the extra income and put it away in a high-yield savings account to maximize earnings.

Keep Expenses and Debt Low

Now is the time to trim your expensive lifestyle – the high maintenance life is not only difficult to maintain, but also risky. The risk is magnified in a down economy, so make it a point to live within your means. Go through your list of expenses and look for opportunities to save money; reduce your entertainment subscriptions, shop at cheaper grocery stores, and limit your utility usage. If you can live well below your means, you’ll be all the better should you lose your job in the future.

If you are able to trim your expenses and keep debt low, leaving a sizeable amount of your paycheck unspent, be sure to save or invest that money. It’s vital to understand the lifestyle inflation trap and prevent yourself from becoming a victim of habitual lifestyle upgrades. For more on this, check out our article, How to Avoid the Lifestyle Inflation Trap.

The Bottom Line: Expect the Unexpected

If your boss told you today that your position would be eliminated in six weeks, you’d immediately start trying to secure your finances and your lifestyle, right? The truth is that people seldom do get any warning of impending wage cuts and job losses, and when that ball drops, it can trigger immediate panic.

However, it doesn’t have to.

Being prepared for any curve balls that may come your way – especially during the COVID-19 pandemic – is the best way to safeguard your financial health, your lifestyle, your comfort, your mental health, and your safety. The key is to start now – you cannot wait. Trim expenses now, save every penny now, strengthen your professional network now, and secure additional side income now.

Once the bottom falls out and you do lose your job without warning, it will be too late to prepare. If there were ever a time to play it safe, plan ahead, and operate on a “just in case” basis with finances, it’s now.


4 Steps to Recession-Proof Your Finances

This blog post was published by Axos bank on February 23, 2021 and last updated on February 23, 2021.

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