You know that on again off again debate about a potential recession heading our way. Economists and money people all have a wide range of opinions regarding this subject. Sure, it’s a common question from our clients and other colleagues. While we remind them that most of this is already incorporated into their financial life planning, I thought I would write a post that addresses the need to know anyway. Here are some practical tips and actionable advice to help you better weather any economic storms that may come.
The last official recession in Canada occurred during the COVID-19 pandemic, between February and April 2020. Since then, the economy has remained strong and has yet to enter a recession.
However, as we move into the fourth quarter of 2023, one expert says he fears this resiliency might be a temporary illusion. In a recent interview, a university economics professor said Canada is likely entering a recession, if we’re not already inside one. He predicted that by September, Canada will start to see its GDP slow down, part of which would be the result of consistent interest rate hikes.
Well, we are here and I am not seeing clear evidence that the recession is present or coming. That said, the jury is still out, though, as economic recessions can be difficult to predict. It’s also possible for Canada to dodge a recession altogether. In either case, it’s always best to prepare for the worst. Even if the country avoids an economic downturn, the following tips will still put you in a better financial position so you can hit the ground running as we move into the new year.
Build an emergency savings fund
I firmly believe that every Canadian should have an emergency savings fund. Whether you’re a teenager working a part-time job, an adult with a full-time career, or you’re heading into retirement, an emergency fund can protect you from unexpected and unplanned events, such as:
- Your vehicle breaking down
- Sudden job loss or layoff
- Illness or injury that puts you out of work for several weeks
- Unexpected home repairs
While employment insurance (EI) benefits can often act as a safety net for those who have been laid off, these benefits don’t last forever and may only cover a fraction of your living expenses. Ideally, your emergency savings fund should be enough to cover at least three months’ worth of living expenses.
If you’re not there yet, don’t panic. You can start by looking at your cash flow and identifying areas where it’s possible to adjust your spending, allowing you to divert more cash towards an emergency savings fund.
Focus on job stability
It’s easy to get tempted by a shiny new job offer. But before accepting, it’s worth considering the industry you’ll be working in. During an economic downturn, certain recession proof jobs and industries can provide better job security than others. Examples include:
- Education
- Government services
- Health care
- Utility services
- Tax and accounting services
Additionally, you should also consider the relationship you have with your current employer. When companies downsize, newer employees are often the first to go. A LinkedIn study shows newer employees that have been working at a company for approximately one year or less tend to get laid off first. Meanwhile, those who’ve built a solid reputation within the company may have greater job security.
If you happen to be a new hire or you’re filling an entry-level position, consider some ways to provide more value or take on more responsibilities to become a critical team member.
Hold off on unnecessary purchases
Perhaps you had a great summer, were able to build your savings, and took home some sizable bonuses and commissions. Like many hard-working Canadians, you may want to reward yourself with a nice vacation, a new recreational vehicle, or a luxury item.
With a potential downturn looming in the future, though, it may be best to hold off on unnecessary purchases for now. Instead, consider putting the extra money into your emergency savings fund.
Pay down high-interest debt
High-interest debt from credit cards, payment plans, or short-term loans can really drag you down during times of economic hardship. If you have high-interest debt, I encourage you to pay it down as quickly as possible. With a higher rate of interest, this type of debt can end up costing you more over time. By paying it off as quickly as possible, this will likely save you a lot of money in the long run.
If you’re unable to significantly reduce this debt, consider refinancing your loan with your service provider. You can also look into obtaining a debt consolidation loan, which involves combining multiple loans into one new loan, usually with a lower interest rate. This can help reduce your monthly interest payments.
Diversify your investment portfolio
In the event of a serious economic downturn, you don’t want to have all of your eggs in one basket. If the main industry you’ve invested in crashes, it could put your entire portfolio in the red.
Instead, invest in companies and industries that have proven to be resilient through economic downturns. According to a report, these types of companies include those producing consumer staples, as well as those in health care and utilities. You may also consider putting some money in cash equivalents such as guaranteed investment certificates (GICs) or high-interest savings accounts.
Review your cash flow
Lastly, take some time to review your budget and living expenses. Look at your recent spending habits and see how closely you’ve followed your budget. Make sure to ask yourself key questions, such as:
- Am I spending more than I should in a certain category?
- Am I earning more income now than when I last updated my budget?
- Have I met my savings goals?
As you answer these questions, adjust your cash flow, and consider setting new goals or spending limits for yourself. This will allow you to save more money and should put you in a better position to weather tough economic conditions.
The bottomline
Economic downturns aren’t always as devastating as what people experienced in past. As long as you’re prepared, you could float right through a minor recession without experiencing any significant changes to your finances. While you shouldn’t panic about the possibility of a recession, it’s important to be prepared for a potential economic downturn by taking consistent actions to better your financial health and Keeping Life Current.
