Personal Finance ─ The prospect of a recession in the US is now more real than ever. The rising interest rates, high commodity prices such as oil, and the current international supply-chain issues are among the most pressing problems facing the US economy. Furthermore, the recent inflation data in the form of the Consumer Price Index (CPI) reached 9.1% in the month of June. As a result, the US Federal Reserve will most likely announce yet another aggressive interest rate hike in their upcoming policy meeting scheduled to start tomorrow, 26th, until the 27th of July.

On a personal level, the three areas mentioned above are beyond our control as ordinary citizens. However, these factors’ detrimental effects could significantly impact our lives and, of course, our finances. Thus, it begs the question: If the dreaded recession indeed occurs, how can we best prepare for it? This article will discuss some of the most practical and actionable steps toward recession-proofing your finances.

Strategies to Incorporate to Attain Peace of Mind

• Start Living Below your Means

The first step is perhaps the most crucial yet the hardest for those who have not yet done so. However, this step is the foundation of recession-proofing your finances. If you live above your means, then that would indicate that at some point, you will have to get into debt to continue your lifestyle, putting you at more risk as consumer debt is expected to rise as Fed continues to increase interest rates.

However, living within your means, contrary to popular belief, is also a piece of ill advice as this would technically mean that your income will be equal to your expenses, leaving you little to none for savings and might force you to take on debt when emergencies such as job loss and hospitalization arise. Thus, cutting on the non-essential expenses you incur would be a sacrifice worth taking. 

• Build your Emergency Fund

When you start to live below your means, the savings you will slowly accumulate will be vital to addressing unforeseen events that could negatively impact your financial well-being. Building an emergency fund to use in case of emergencies would prove beneficial in adding a layer of protection against financial ruin. 

As a rule of thumb, aim to save at least three to six months’ worth of your living expenses towards this fund.

• Look for other Income Streams

For many of us, cutting on non-essential expenses and starting to save for an emergency fund won’t be enough to weather the potential storm brewing. Therefore, looking for other income streams that would be suitable for you as well as within your area of expertise would give you the highest return on the time you will invest/sacrifice. In addition, you can also consider learning a new set of skills that are in high demand to fulfill a market need and update your existing skill-set.

Having another income stream would expedite your emergency fund building, allow you to pay off your existing debt faster, and further take additional financial protections such as getting insurance and starting or adding to your existing investments. 

Final Note

At the end of the day, prevention is better than cure. Never wait for financial/economic problems to pile up before you start to take action. Being in a better financial position is a choice you could take and work towards. Admittedly, changing your money habits and making sacrifices will not be easy, yet it will be worth it, especially if the current economic dilemma worsens.