Insights & advice
How to prepare financially for a recession
October 2022 – 15 min read
A recession impacts all aspects of the economy, including savings and investments.
It can also lead to higher rates of unemployment, which can also impact your day-to-day finances.
Having a financial plan in place to deal with economic downturn can help you through times of uncertainty.
What’s in this article?
What is a recession?
A recessionOpens in a new window refers to a period of economic decline.
During this time, the country’s gross domestic product (GDP), which measures the value of goods and services being produced, drops. Stocks and other investments can drop in value as cautious investors sell or divest to protect their portfolio against losses.
There are several factors that contribute to a recession, including sudden shocks to the economy (such as natural disaster, war, or a terrorist attack), inflation, rising interest ratesOpens in a new window and an overall lack of consumer confidence.
Recessions are an unavoidable part of every economic cycle, but there are some things you can do to help protect your savings and investments.Opens in a new window
How to prepare financially for a recession
Have an emergency fund
During a recession, you may find yourself impacted by scaled back hours or job lossOpens in a new window. That’s why it’s a good idea to have savings set aside to cover 3 – 6 months of basic living expenses.
If you don’t have a so-called “rainy day” fund now, you may want to reassess your budget to see if you can save more money each monthOpens in a new window.
Reassess your budget often
Should a recession occur and cutbacks become necessary, you’ll need to know what’s essential and what can be scaled back on or eliminated from your budget altogether. Having a budgetOpens in a new window and knowing what your monthly payments are will help you choose what can stay and what goes.
If you haven’t done recently, go through your bank and credit card statements to look at things like your mortgageOpens in a new window or rent, food, insurance premiumsOpens in a new window, debt repayment, transport and child care costsOpens in a new window among other expenses to get a clear idea of what your day-to-day finances look like.
Don’t fall behind on debt
If it’s time to tighten the belt, 1 thing that should remain prioritized are your debt repayments. Things like your mortgage payments should take priority so you don’t fall behind on your payments.
Even if you can only make minimum payments on everything else, you should continue to keep paying outstanding credit cards, line of creditOpens a new website in a new window, utilities, student loans and other bills to prevent interruption to your service as well as to protect your credit score.
Review your investments
If you have investments, you may be worried about how a recession will impact your portfolio. Even when markets are experiencing volatilityOpens in a new window, it’s a wise idea to say invested and focus on the long-term, as history has shown that markets recover over a period of time.
Try not to react emotionally, and instead speak to your financial advisorOpens a new website in a new window about your options. It may be that if you need to increase your cash-flow to handle everyday bills, you could reduce the amount you’re investing to free up extra money.
Create a back-up plan
With a recession often comes lay-offs and hiring freezes, and so many people experience unemployment. If the worst should happen and you’re laid off during a recession, what would the short- and long-term future look like for you and your family? Think about things you could do in the immediate aftermath to cope.
How will you earn income? Are there things you can sell to generate cash flow? Are you able to defer any payments or consolidate any debt? Can you cut back on any unnecessary expenses like eating out or entertainment subscriptions? Are you eligible to claim any benefits like Employment Income (EI) that could help you financially through job loss?
Don’t forget to talk to loved ones around you and take care of your mental healthOpens in a new window during this period, too.
Reconsider your career path
For some people, a job loss may be an opportunity to re-evaluate their careerOpens in a new window and perhaps make a change altogether. This could be a chance to perhaps pursue a passion project or side-hustleOpens in a new window that could develop into a small businessOpens in a new window or freelancing opportunity.
You could consider consulting, going back to school, or switching to gig-work or something different to your chosen career completely. Keeping your resume up-to-date and leveraging your social networks can help you explore opportunities that may turn unexpected job loss into a welcome change.
Work with a financial advisor
An advisor can provide help during good times as well as when things become challenging, and help you through things like recession, job loss, and changing financial situations.
Having a plan in place can help you weather the unexpected.
If you’re unsure of how to prepare financially for a recession, speaking to an advisorOpens a new website in a new window can help.
The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature, and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.