10 Tips for Dealing with a Recession

What is a recession?

A recession can be defined as follows: a decline in a country’s gross domestic product (GDP) over at least two consecutive quarters or a shrink in GDP over six months.

The impacts of an economic recession include higher unemployment and a slowdown in business growth. A recession can be a difficult experience, generally lasting between six and twelve months. Let’s not forget that a recession is not the same as an economic depression (like the Great Depression during the 1930s).

How can you protect yourself from the impact of a recession?

When this kind of economic situation is on the horizon, it’s natural to be concerned. However, don’t forget that you can take certain financial steps to prepare and get through it without too much damage.

Take action

The first thing you should do is make changes to how you’ve managed your finances so far. If you’ve accumulated debt, now’s the time to adopt good financial habits and get back on track.

Live within your means

Regardless of whether a recession is looming, the first step in properly managing your finances is living within your means. We all have a tendency to buy items that we don’t need. During an economic recession, learning to tighten your belt and cut out unnecessary expenses is a smart move. Instead of going out to restaurants, prepare your own meals as often as possible. Take your holidays in Quebec and aim for simplicity. Make do with what you already have. For example, rather than buying a new car, have your current one repaired. Put off renovating your kitchen or bathroom. These projects can wait until next year.

Manage your credit card debt

As you already know, there are “good” and bad debts. For example, your mortgage is considered “good debt.” On the other hand, credit card debt is one of the worst debts since it carries the highest interest rates (often around 20%). During normal times and especially during an economic recession, you should prioritize reducing your credit card debt.

Draw up a budget

Regardless of the economic situation, making a monthly budget is an excellent way to properly manage your finances and see where you stand. Use our free online budgeting tool or an Excel spreadsheet to list all your income sources and expenses and see where you can cut back (online movie subscriptions, entertainment, etc.). Renegotiate your insurance policies (life, care, home, etc.). You’ll be surprised to see how much prices vary from one company to another.

By creating a well-defined personal or family budget, you’ll gradually regain control over your finances and you can make changes when needed.

Build up an emergency fund

Whether or not there’s a recession, building up an emergency fund to deal with unexpected events is always a good idea. This will save you from paying interest fees or getting further into debt in the event of an unforeseen expense. As a rule, you should set aside three months of expenses. Deposit the money in a high-interest savings account.

Also, instead of making additional payments on long-term debt with a lower interest rate such as your mortgage or car loan, reduce these payments and add the money to your emergency fund.

Avoid getting further into debt

If you already have debts, discuss all your options with your financial advisor before borrowing money. However, if you have no choice but to take out a loan, borrow only what you need and take time to compare the various interest rates.

Pay your bills

With inflation, grocery shopping costs more so you have less money at the end of the month. However, you should still try to pay all your bills on time. If this isn’t possible, make the minimum payment and contact your service providers. Certain providers may offer you a payment plan spread out over several months.

Don’t count on a salary increase

Businesses also feel the squeeze during a recession and are often forced to cut bonuses and salary increases. Therefore, when you’re drawing up a monthly budget, don’t bank on higher income this year.

Set money aside for taxes

If you receive unemployment benefit payments, set money aside for paying taxes because the amounts allocated to you are taxable. This will help you avoid unpleasant surprises.

Find a way to increase your revenue

If you have spare time on evenings or weekends, try taking on a little extra work to help you make ends meet every month.

Above all, bear in mind that your hard work will pay off! Recessions are a normal part of the economic cycle and they don’t last forever. Once you’ve learned to make a budget, manage your credit card debt and reduce your spending, you’ll have good financial habits for life. And if you ever feel that you can’t weather the storm, contact one of our licensed insolvency trustees. They can help you build a strong financial plan and find ways to reduce your debt.