5 Financial Steps You Should Take Before a Recession

iQuanti: Throughout 2022, the Federal Reserve has been hiking interest rates at an unprecedented rate. While this is intended to curb inflation, many economists expect that it will eventually have a negative impact on business and cause the economy to slow and unemployment to rise. If you're worried about this happening, then here's how to prepare for a recession and get your finances in order.

1. Don't panic

The first thing to remember about recessions is that they're normal. The economy is cyclical, moving from boom to bust and back every few years. While things like high unemployment and a falling stock market can be scary, they don't last forever. Since 1950, the average recession has been about 17 months long. During a recession, you should hold tight and ride out the storm until it passes.

2. Make sure your budget is in order

During a recession, money could get tight. There's a chance that your investments may not do very well, and your employer may not be giving out any raises or bonuses. Before this happens, it may be a good idea to start trimming the fat from your spending wherever you can. Check any bank and credit card statements for anything that could be eliminated. If you have any major purchases upcoming, consider delaying them too.

3. Build up your emergency fund

Part of what makes a recession scary is the fact that it generally results in higher unemployment. Even those who get to keep their jobs may be forced to take unpaid time off to help the business alleviate its losses.

If this happens, then you're going to need money to get you through the next couple of months. Many financial experts recommend that every household builds up an emergency fund. An emergency fund is a cash account worth three to six months of living expenses. By having this available, you won't have to turn to high-interest debt to get by.

4. Raise your credit score

Even with a lean budget and fully stocked emergency fund, what do you do when a major unexpected expense comes along that you're not prepared to handle? The answer is that you may have to apply for a loan, so you'll want to make sure that your credit score is in good shape.

Start by checking your FICO Score for free using a service like Experian and looking over your report to make sure it's error-free. At the same time, commit to practicing good credit-building habits such as:

• Paying your bills on time and in full
• Keeping your credit usage lower than 30 percent of your limit
• Not closing your oldest accounts
• Not applying for too many credit cards or loans at once

5. Stick to your investment plan

When the stock market drops right before and during a recession, your natural reaction may be to stop contributing to your retirement plans altogether. But don't do this. Remember that the classic investment mantra is to "buy low, sell high." While the market is down, this is a great time to take advantage. You'll effectively buy shares of great companies at a discount. And when things finally turn around, and those investments rise in value, you'll be glad you did.

The bottom line

Recessions can be a scary time for your money, but you can take steps to prepare. Start by taking a hard look at your budget, building up your emergency fund, and boosting your credit score. Remember that recessions don't last forever and that this can be a great time to buy good investments while they're at a discount.

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