The Great Recession that peaked in 2008. It was caused by a housing bubble that burst in spectacular fashion. But a recession is simply a general decline in economic activity over a period of time. The economy can get sick just like the rest of us. I haven’t been sick in quite a while, but it isn’t likely I’ll live the rest of my life without the occasional cold or catching something that lays me a low for a day or two. Like an illness, we don’t know when a recession will hit, but we know we likely won’t last our lifetime without going through another recession. So, prepare your debts for a recession now. Here are four ways to build up your recession immunities now and take the sting out whenever it shows up.
1. Establish a Budget
With personal finances, it always comes back to your budget or spending plan. You need to know what portion of income can go toward paying down debt and your budget is going to give you that answer. You will know where your money is being spent each pay and on what. Is it a need or a want? Once you have your working budget, you should figure an emergency budget. What if you lost your job, what expenses could you cut if it became necessary? Make sure your needs are met but cut back harshly on the wants. Remember, this is only a budget you would use in a crisis. See how low you can go with expenses. Should a recession strike, you can refer to your emergency budget to get you through the crisis. It is temporary and may never need to be used but you need to reflect on your options before any potential crisis becomes reality.
2. Prioritize Debt
Big shocker! This is obvious to most people, but I want you to not only look at paying down your debts, but to figure out how you can pay them down faster. With your budget in hand, you know what portion of your income can go towards paying down debts. Dedicate the highest payments to high interest accounts first. See if you can qualify for a low interest or no interest rate with a balance transfer to an existing or new credit account.
3. Consider a Debt Management or Repayment Plan
If your balances are too high to pay down in a reasonable amount of time like 4 years, consider a Debt Management Plan. This tool can help you lower interest rates and organize the repayment of your unsecured debts. If you have student loans, go to the Federal Student Aid website and look at the estimates to repay your student loans. Try to pick the highest payment you can afford in order to pay the lowest amount of interest.
4. Don't Take Unnecessary Risks
Human nature is a funny thing. Once we pay off a debt, we tend to replace it with something else right away. “What can I buy next?” is the constant refrain running through our heads. As a society, we are great at consuming goods and services as fast as they can be produced. As individuals we are seeking financial security, we must fight our natural urges to spend what we have and instead delay making new purchase. Rather than dream about the next item on your want list, focus on how to secure your finances so that whenever the next recession comes, you can ride it out with ease.
John Dewey said it best – The best preparation for the future is a well-spent today.
For more tips on how to prepare your debts for a recession, check out Apprisen’s youtube video: