Are you prepared for the recession?

March 27th, 2008 | By SebBudgeting

emote.jpgIt seems like you can’t go a day without hearing about the current U.S. recession. Home prices are plummeting, stocks are losing value by the day, oil is soaring, and the dollar is tanking. While individually these problems might not affect you, combined they can pose a serious threat to your financial wellbeing.

All in all, things aren’t looking good for the average American. With rising inflation and growing uncertainty in the job market, how can you prepare yourself if you or your spouse join the ranks of the unemployed?

My wife and I made a difficult decision earlier this year to not go to Europe to visit family for a family reunion. In fact, we don’t have any vacations planned that involve spending money on rental cars or hotels. We’ve cut back on a lot of frivolous spending in an effort to better protect ourselves against the unexpected, and you should to. Even though you might be able to afford to eat out a few times a week doesn’t mean you should. Look at your budget and see how you can trim your spending to help perform the tasks below.

Pay off all unsecured debt
If you have any unsecured debt (that is, debt that isn’t secured by something tangible such as a house or car), pay it off as soon as possible. Stop using your credit cards, and put a plan in place to pay any remaining balances off as soon as you can. Credit card companies are notorious for raising the interest rates on their cards for no apparent reason. If you were to lose your job in a recession, the last thing you want to worry about is making payments on a high interest card.

Beef up your emergency fund
You do have an emergency fund, right? You should have, at a minimum, three month’s worth of expenses saved in a savings account that is easily accessible. If you’re emergency fund is already funded with three month’s worth of expenses, look at increasing it to six months. The point is that you want to create a cushion that can soften any financial blows that might come your way.

Cap your living expenses
While this may sound absurd to you know, consider capping your expenses to around half your income. So if your household income is $5000 a month, try to shoot for a total budget of $2500. This would include your rent or mortgage, car payments, utilities, groceries, and clothing. The temptation to spend the money might be great, but if you can condition yourself to live well below your means, a pay cut or job loss won’t be nearly as painful as it could be.

Don’t panic
In the end, you shouldn’t panic. While a recession can be scary, it doesn’t have to be. A little financial foresight goes a long way into ensuring that you and your family are well prepared should the unexpected happen. By paying off credit cards, beefing up your emergency fund, and capping your expenses, you’re making sure that you are one step ahead of most people when it comes to preparing yourself for a recession.

5 Responses

  1. JB

    These are great tips in general… not just for a recession. But I have to say - at some point you have to stop preparing for the big disaster and live your life. You don’t know what might happen tomorrow and you may never get to take that trip to Europe. Just something to also consider.

    JB’s last blog post..Netflix - Winner or Loser?

  2. Mom @ Wide Open Wallet

    I’m doing all that except living on half our income. My family would have to live in our van in order to do that. (an uninsured van with no gas, at that)

  3. Seb

    @ JB: It wasn’t so much the slowing economy that made us decide to not go to the Europe insomuch as the tanking dollar. Most goods and services are more expensive in Europe compared to the U.S. to begin with. Factor in a weak dollar and it becomes unaffordable.

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