by Although a 2023 recession is not guaranteed, economic indicators suggest that we may well face an economic recession early next year.
On Dec. 7, the Bank of Canada raised its overnight rate by another 50 basis points to curb recent inflation. This, along with RBC analysts’ forecast of a recession in the first quarter of 2023, points to a possible economic pullback next year.
Regardless of whether the country sees a recession in the near future or not, it is still a good idea to create a financial action plan to reduce risk. Below I’ll share some practical tips to help you and your family prepare, but first let’s go over what exactly happens during a recession.
What happens in a recession?
Bank of Canada Governor Tiff Macklem noted in a public statement on November 14 that “Slowing economic growth is disproportionately affecting our most vulnerable households. High inflation and high interest rates against inflation are placing an additional burden on our low-income households.
During a recession, a country’s gross domestic product tends to fall because some industries earn less revenue.
Some possible consequences of recession are:
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Increased unemployment and job losses
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Reduced spending by consumers, which hurts businesses
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Falling prices in the housing market
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A pullback in the stock market, leading to losses for investors
Financial action plan tips for a possible recession in 2023
When it comes to personal finances, it’s good practice to prepare for the worst. Canada’s top economists are predicting a recession, so consumers should take note and plan accordingly.
Here are some actionable steps you can take to limit the impact of a recession on your economy.
1. Assess your investment risk
Now is the time to review your investments to see if you are comfortable with how much risk you are exposed to.
Higher risk investments have a greater chance of receiving more investment losses than lower risk investments. A classic example of this is higher risk investments such as stocks versus lower risk investments such as bonds. During a recession, stocks tend to suffer larger losses than bonds.
This can cause a lot of sleepless nights and stress if your portfolio starts to fall too low during a downturn than your risk tolerance allows.
Complete our free online investor survey to see if your current investments match your risk tolerance. If you are exposed to too much risk, consider adjusting your portfolio to something with lower risk, such as fixed income, GICs or high interest savings accounts.
2. Pay off high-interest debt
If you have open lines of credit with variable interest rates, expect them to increase during a recession. Thanks to recent interest rate hikes by the central bank, Canadians will see much higher interest rates and payments imposed by their creditors.
Before interest rates get too high, it’s a good idea to pay off as much of your debt as possible. The lower your principal balance, the less interest you will have to pay.
It’s best to be proactive here because you’re less likely to not have extra funds available during a downturn.
3. Increase your emergency savings
Rising inflation and increased prices of daily services and necessities can be dangerous for your savings. With a potential recession looming in the coming months, extreme caution is warranted.
Instead of burning through your savings, try your best to cut your expenses and use the money to build your emergency savings. If you’re not sure where to start, here are three big areas where you can potentially cut your spending. your housing, transport or food. I find that most people tend to have one area where they overspend.
An economic downturn can often lead to unexpected circumstances such as job losses, reduced working hours and pay cuts. If you were counting on the bonus, this may also be postponed.
The more you’ve saved, the easier it will be to handle these sudden changes so you don’t fall behind on your bills or find yourself unable to support your family.
4. Optimize your resume
Unemployment and reduced working hours are very common during a recession when companies cut back on non-essential jobs. One of the best ways to improve your job security is to continue to provide value and go above and beyond the basic requirements of your position.
However, you also have to prepare for the possible loss of your job. If your working hours are reduced, you may have to look for another job.
To speed up the process, you should review and optimize your resume and make sure you have a backup plan in case your job goes south.
5. Reevaluate your monthly budget
If you don’t have a clear monthly budget, you’re likely to spend more than you should. Whether you’re single or in a family on a budget, I recommend sitting down and looking at your income and expenses to create a budget that will help you save more money.
Calculate your monthly income and determine how much you spend on bills, fuel, groceries and other essential expenses. Then try to find categories where unnecessary spending can be cut.
6. Postpone expensive purchases
If you were thinking of buying a new car, recreational vehicle, renovating your home, or going on an expensive vacation, it might be best to postpone unnecessary spending. If a recession comes, many of these things can naturally go down, meaning you’ve spent the extra money for no reason.
In addition, many of these types of expenses are not necessary. To ensure that you are adequately prepared for a recession, it is better to divert these funds to emergency savings.
Result
As Benjamin Franklin famously said, “If you fail to plan, you plan to fail.”
It is very possible that Canada will see a recession in early 2023. Although it is not a guarantee, you should still prepare for the economy by cutting unnecessary expenses and accumulating savings.
Even if the economy changes from its current course, you’ll still be better off by being prepared because you’ll have saved more and increased your financial worth.
Christopher Liew is a CFA charter holder and former financial advisor. He writes personalfinancial tips for thousands of Canadian readers every day on his Wealth Awesome website.
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