You can’t always be fully prepared for inflation or a recession — they can be difficult to predict far in advance. But there are steps you could take to shore up your finances and put yourself in the best possible position to weather a financial storm.
Here are some ways to prepare.
Get familiar with your money
If you haven’t taken a hard look at your finances before, now is a good time to start. You could create a full accounting of your finances in a spreadsheet, on a piece of paper or in an app on your phone, depending on your personal preference. Include all of your income, spending, savings, bills, debts and investments to capture the full picture.
Once you have all the key information in one place, look closely at where your money is going. Be honest about how you’re spending your money, whether you’re happy with your financial habits and how you could reallocate your funds if necessary.
Pay off debt
If you have a lot of debt, and especially if it’s high-interest credit card debt, you’ll want to pay down as much as possible as quickly as possible. Taking a hard look at your budget can help you tackle debt since it could help you identify where you can spend less in order to pay down what you owe more quickly.
If your debt feels unmanageable, you could consider looking into a personal loan to consolidate your debt. A personal loan can help you streamline your debts into a single, fixed monthly payment at a potentially lower interest rate.
Focus on your savings
To prepare for a difficult economic time, you’ll want to save as much as possible. If you tend to spend before you save, using a budgeting system can help you reprioritize your money.
With the 50-30-20 budget method, you spend 50% of your money on essential items, 30% on your wants and 20% on savings. You could tweak these percentages based on your goals and financial situation — perhaps you’re aiming to save 30% each month instead, or 10% is all you can do for the time being. Find a budgeting system you can stick to as you work to build your savings.
You might also set up an automatic transfer from your checking account to your savings account once per month or every payday. You won’t have to think about moving the money yourself, which could help you avoid spending it first.
Set up an emergency fund
Along with your primary savings account, it might be beneficial to add any extra money you can to a savings account set up specifically for emergencies. Most experts recommend having 3-6 months of living expenses on hand in case of job loss, a trip to the ER or a hefty home repair bill. Opening a high-yield savings account can be a good way to kick-start an emergency fund that earns more interest than a regular savings account typically does.
Diversify your investments
If you have investments, such as stocks, bonds or real estate, diversifying your portfolio is key to limiting your exposure in a volatile market. If all your money is in one investment and it takes a turn with the economy, you risk losing it.
Some investments are long-term, like retirement accounts, while other investments may be shorter-term, such as flipping houses. It’s a good idea to identify which types of investments you could liquidate quickly to raise cash if you need to, and how it might affect your taxes if you do.
Investing can be overwhelming for many people. If you don’t feel confident about investing or don’t think you have the knowledge to come up with a solid investment strategy, look into hiring someone with specialized knowledge, such as a financial adviser.
Prepare for more peace of mind
It’s difficult to predict when the economy is going to turn in a new direction, so it’s best to prepare however you can. Take a hard look at your finances, pay down debt, try to prioritize saving and setting up an emergency fund and check on your investments.
At the same time, stay flexible and be ready to shift your approach to protect yourself based on how the economic situation shakes out.
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