This 5-step budget plan can protect you from recession

Boosting your financial security before a recession can save you from financial disaster. Here’s a five-step plan to protect your money from recession.

1. Create a budget and stick to it

Creating a budget starts with tracking all of your income and expenses. You can use budgeting or spreadsheet apps. By categorizing expenses into needs versus wants, you can identify expenses that are easier to cut if your income decreases (such as unused subscriptions, dining out, and vacations).

Make sure to review your budget monthly so you can track every dollar. Make any necessary adjustments based on changes in your income, current inflation, or unexpected expenses.

2. Build an emergency fund

As a general rule, it’s best to save three to six months of monthly expenses in liquid cash for a healthy emergency fund. If you’re someone who brings more income into your home and have a spouse, a child, and a mortgage, aim to have 6+ months of emergency savings.

Place your emergency fund in a high-yield savings account to earn interest along the way. This can serve as a financial lifeline in the event of a recession.

Start small with a goal of $500 to $1,000 to build momentum, then scale your goal upward. By starting small, you can avoid burnout. This will help you stay on track to achieve your larger savings goals.

Consider setting up automatic transfers from your checking account. You can align automatic transfers with your payday – that way, money is transferred instantly, and your savings will grow on autopilot.

3. Diversify your investments

Investing in index funds, bonds, and low-cost ETFs can help you diversify your savings and mitigate risk. If you think the economy is headed toward a recession, it’s a good idea to reevaluate your asset allocation, enhance your diversification, and reduce your weight in investments that are likely to be more volatile.

In the long-term investment portion of your portfolio, it is important to avoid panic selling. The stock market may experience declines and fluctuations at times. However, focusing on a consistent investment strategy in the long-term portion of your portfolio has historically led to the best financial results.

4. Create multiple sources of income

Developing multiple sources of income can strengthen your budget and help you stay afloat in a recession. Start by identifying ways to monetize an existing skill or hobby, freelancing in your field, teaching kids, or getting a job like ride-hailing or food delivery.

At the same time, invest in dividend-paying stocks that have a strong history of growth to create a passive income stream, which can supplement your earned income.

Diversifying sources of income also reduces dependence on one employer. This is useful if you’ve been laid off from your 9-to-5 job and don’t already have one or more side hustles or passive sources of income. You may find yourself scrambling to find new work quickly to avoid using up your emergency fund or drowning in credit card debt to make ends meet.

5. Make sure your financial institution is on your side

Using the right bank or financial institution can be a big help during a recession. Look for a bank or credit union with low fees, easy-to-use tools, and good interest rates for savings accounts, all of which may help you save money.

Another option is to switch to an online bank that offers higher interest rates (which many banks refer to as Annual Percentage Yield, or APYs for short) and budgeting tools. Some tools to look for include real-time transaction and fraud alerts, automatic savings transfers, and responsive customer service.

Finally, be sure to verify that deposits at your institution are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), which is especially important during a recession.

Bottom line

There are many strategies you can use to protect yourself from a recession. By creating a manageable budget, you can empower yourself to create and grow an emergency fund, diversify your investment portfolio, and add sources of income. It is also important to find a financial institution that is insured by the FDIC or NCUA. Small steps today can lead to greater stability in the long term.