- Economists are sounding the alarm about a likely recession in 2023.
- Insider spoke to five personal finance experts to get their tips on preparing for a downturn.
- Building an emergency budget by changing your spending and saving habits is key, they said.
Alarm bells are ringing over the US economy and recent modeling by Bloomberg economists revealed a 100% chance of a recession next year.
This means it’s probably time to take action to protect your finances.
Insider spoke with five personal finance experts to uncover key steps to help you protect your finances ahead of a turbulent 2023.
1. Build an emergency fund
Experts have advised setting up an emergency fund to cover your expenses if you lose your job. Such a fund would ideally cover three to six months of expenses, they said.
According to the Bureau of Labor Statistics, the average U.S. household spent nearly $67,000 on expenses — like housing, food, and transportation costs — in 2021. So, for the average household, the emergency fund is expected to be range between $16,750 and $33,500.
Jeremy Schneider, founder of the Personal Finance Club, a website that sells financial education courses on budgeting and investing, said that if you haven’t saved three to six months of expenses, you’ll have to spend less and save more to get there.
Getting a budgeting app might be the best way to do this, according to Steve Chen, founder of Call to Leap, an educational investing site. These can help you better visualize and prioritize your spending.
2. Reduce your regular expenses
Thinking seriously about day-to-day expenses can help you save money. Such an exercise often takes the least effort and pays off the most, said Cameron Huddleston, author and director of Carefull, a financial security service for seniors.
Bundling your car and home insurance, finding a cheaper cell phone or internet plan, reducing the number of streaming subscriptions you have, and making your own coffee and lunch rather than buying them every day can prove be easy wins to reduce regular expenses.
Paying off your higher-interest credit cards during rising rates may be the most effective way to pay off debt before it’s too late, Chen said.
3. Control big expenses and get the most out of your home
Cutting costs such as streaming subscriptions can result in some nice little savings, but such expenses are nonetheless small compared to the basic burdens on your finances.
The cost of running a car is usually more than necessary, Schneider said, and can be a key source of debt for many. If there are two vehicles in your household, it might be time to consider getting rid of them and joining a car-sharing club, buying a bike or scooter, taking public transport, or to walk, suggested Chen.
Emilie Bellet, founder of education funding site Vestpod and host of the Wallet Podcast, tells people to take a hard look at their spending habits: “When we recognize which specific emotions drive our impulsive spending, then we can be more attentive to our decisions.”
Yet housing is the biggest expense for most people and can seriously alter your financial resilience, experts said.
Huddleston advised landlords to think about renting out spare rooms or opening them up to AirBnBs.
Schneider said, “Your problem is your $650 payment on your truck that’s sitting outside. Your problem is your $2,000 rent. So the options are things like finding a roommate or downgrading your car.”
Income can also be found from unwanted possessions around the house. “Look around your house and say ‘what can I sell for money?’ is another way to get money for a small job,” Huddleston said.
4. Look for jostling
Ahead of a likely downturn, it might help to take advantage of a strong job market that still has plenty of jobs.
If you have the time, finding a side job is the fastest way to earn extra income, experts say. For example, Schneider said, a bar shift that pays $100 could bring in $800 in extra income a month if you’re able to make two a week.
Dog walking, babysitting, taking paid online surveys and gardening can also help earn extra money when needed, experts said.
In a time of “over-employment”, remote work and silent resignations, Chen said people are increasingly able to find the time to take on extra jobs and hustles from home.
5. Find sources of passive income
Passive income streams are the holy grail of financial independence – but it takes a lot of groundwork to get them in place.
“Dropshipping” – acting as an intermediary between a supplier and its customers – affiliate marketing and generating advertising revenue from websites are ways to create passive income streams. Some people bought vending machines and rented goods.
Olamide Majekodunmi, founder of All Things Money, a financial education blog for millennials, said it’s important not to invest too many upfront costs in passive income streams in hopes they will wear their fruits.
And Chen said it still takes a lot of work to get to a point where you can enjoy passive income. He earns money by uploading old videos on social networks.
The negative effects of a recession, such as lower incomes and higher unemployment, may not become apparent until a few months after the start of the recession. That leaves plenty of time to develop a new, monetizable skill, Schneider said.
Learning search engine optimization, content writing and user experience design, for example, are in-demand skills for companies and offer plenty of freelancing opportunities, Huddleston both said. and Schneider.
“There are so many free online courses now that allow you to strengthen those skills,” Majekodunmi said.
7. Transfer extra income to a hard-to-reach savings account
Once your finances are on better footing, you should start automatically transferring extra income to a savings account that you can’t easily access, to stop the temptation to spend, Huddleston said.
“Have that amount, the total amount that you’re saving from all of these ways of cutting your expenses in half, automatically transferred to a savings account,” he advised.
8. Do not panic!
The worst thing you can do with a downturn on the horizon is to act recklessly, experts tell Insider. Now is the time to make sure your financial fundamentals are on track – and not necessarily to take money out of investments.
“If you’re already an investor, it’s important not to panic and keep your mind focused on long-term goals,” Bellet said. “Keep investing. Remember, investing consistently over a long period of time works.”
Don’t try to pack all of these suggestions at once or you risk being overwhelmed, Chen said. “Start by downloading a budgeting app this week, then in two weeks pay off a credit card. The rest will follow.”
Schneider said households should try to keep spending below income and increase savings, regardless of the state of the broader economy.
“A habit of what rich people do is they don’t think about this week,” he said. “They’re thinking about six months, or a year, or five years from now.”
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