This is the most important thing to do in a recession


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Make sure your finances are recession ready.

Key points

  • Many experts predict that a recession is imminent.
  • A recession can have a negative impact on your finances.
  • In the event of a recession, make sure your emergency fund can cover up to 12 months of expenses.

It is an open question whether the United States is currently in a recession. Traditionally, recessions were often defined as two-quarters of negative gross domestic product. And based on that definition, the country went into recession last summer.

However, the National Bureau of Economic Research (NBER), which defines US business cycles, has yet to declare a recession, in part due to low unemployment.

Even though the country is not currently in a recession, there is reason to believe that we soon will be. The majority of CEOs worry about the arrival of just one. And the former US Treasury Secretary in the Clinton administration agrees.

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Recessions are usually bad news for people’s finances. So what can you do to make sure you’re prepared for an economic downturn?

Do it now to get your finances ready for the recession

If you want to make sure you’re ready for a recession, there’s one key step you need to take: you need to increase your emergency fund. While most experts traditionally recommend that you have saved around three to six months of living expenses, you may want to increase this amount so that you have up to eight to 12 months of reserve.

Having more money saved can be invaluable during a recession, as you are more likely to have to rely on it.

You see, companies often lay off workers during a recession, and it can be harder to find a job during tough economic times. If your job is cut and it’s taking a long time to find another one, having a large emergency fund could be crucial to keeping bills paid and avoiding credit card debt.

Moreover, during a typical recession, the stock market also experiences declines. If the value of your investments falls, you don’t want to be forced to sell before an inevitable rally occurs. By doing so, you would get stuck in losses that you could have recovered from if you had waited longer.

A larger emergency fund will save you from having to sell investments to cover your living expenses. You can leave your investments alone until economic conditions improve and rely on your emergency savings for anything you may need to pay in the short term.

How to increase your emergency fund

Saving a larger emergency fund may seem difficult, but it’s definitely worth it to prepare for a recession.

The best thing you can do to increase the amount you put in your savings account is to look for ways to cut costs. You can do this by going through your budget to identify areas to cut spending. Remember that this is not necessarily a permanent reduction. If you can sacrifice a little more over the coming weeks and months, you can ensure that you are in good shape for an economic downturn.

If you don’t already have a budget, making and living with one could make a huge difference in how much you can save for a rainy day.

The good news is that the economy goes through cycles, so we will recover from a recession. But having your emergency cash available can help ensure the downturn doesn’t have a lasting negative effect on your financial life.

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