Although a 2023 recession isn鈥檛 guaranteed, economic indicators point to the fact that we could very well face an economic downturn early next year.
On December 7, by an additional 50 base points in an effort to cool down recent inflation. This, combined with during the first quarter of 2023, hints at a possible economic pullback next year.
Regardless of whether or not the country sees a recession in the near future, it鈥檚 still a good idea to create a financial action plan to help mitigate your risks. Below, I鈥檒l share some practical tips to help you and your family prepare, but first let鈥檚 go over what exactly happens during a recession.
What happens in a recession?
issued on November 14 that 鈥淪lowing economic growth will disproportionately affect our most vulnerable households. High inflation and high-interest rates to combat inflation put an additional burden on our lowest-income households.鈥�
During a recession, the country鈥檚 GDP tends to decrease as some industries earn less revenue.
Some potential outcomes of a recession are:
- Increased unemployment and job loss
- Reduced spending by consumers, which hurts businesses
- Price drops in housing markets
- Stock market pullback, which results in investor losses
Financial action plan tips for a potential recession in 2023
When it comes to your personal finances, it鈥檚 good practice to prepare for the worst. With Canada鈥檚 top economists predicting a recession, consumers should take note and plan accordingly.
Here are some actionable steps that you can take to limit the recession鈥檚 effect on your finances.
1. Evaluate your investment risk
Now鈥檚 the time to look at your investments to see if you鈥檙e satisfied with how much risk you are exposed to.
Higher-risk investments have a higher potential to incur more investment losses than a lower-risk investment would. The classic example of this is higher-risk investments such as stocks versus lower-risk investments such as bonds. During a recession, stocks generally sustain larger losses than bonds.
This can cause a lot of sleepless nights and stress if your portfolio value starts dipping too low during a recession than what your risk tolerance allows.
Take a free investor questionnaire online to see if your current investments align with your risk tolerance. If you鈥檙e 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 down high-interest debt
If you have open credit lines that are subject to variable interest rates, then expect these to increase during a recession. Thanks to the central bank鈥檚 recent interest rate hikes, Canadians are seeing much higher interest rates and increased fees imposed by their creditors.
Before interest rates increase too much, it鈥檚 a good idea to pay your debt down as much as you can. The lower your principal balance is, the less you鈥檒l end up forking over interest payments.
It鈥檚 best to be proactive here, as you鈥檙e less likely to have extra funds available during a recession.
3. Build your emergency savings
Increased inflation and higher prices for everyday services and essentials can be hazardous to your savings. With a potential recession looming in the next few months, this is something to be very wary of.
Instead of burning through your savings, try your best to cut back on expenses and use that money to build your emergency savings. If you鈥檙e unsure where to start, look at the three big areas where you can potentially cut back on spending; your housing, transportation, or food. I find that most people usually have one area where they are overspending on.
Economic recessions can often result in unforeseen circumstances, such as job loss, reduced hours, and pay cuts. If you were counting on a bonus, this might be postponed as well.
The more you have saved, the easier it will be to deal with these sudden changes so that you don鈥檛 fall behind on your bills or find yourself unable to provide for your family.
4. Optimize your resume
Unemployment and reduced hours are very common in a recession, as businesses cut down on non-essential positions. One of the best ways to improve your job security is to continue providing value and to go above and beyond the base requirements of your position.
However, you should also be prepared for potential job loss. If your hours are cut, you may also need to pursue a second job.
To speed up the process, you should revise and optimize your resume, ensuring that you have a backup plan if your job goes south.
5. Reevaluate your monthly budget
If you don鈥檛 have a clear monthly budget, then you鈥檙e likely spending more than you should be. Whether you鈥檙e single or living in an economic family, I recommend sitting down and going over your income and spending to create a budget that allows you to save more money.
Calculate your monthly income and determine how much you spend on bills, fuel, groceries, and other necessary 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, a recreational vehicle, remodelling your home, or going on an expensive vacation, it might be best to postpone the unnecessary expenditure. If a recession occurs, the cost of many of these things may naturally decrease, which means that you will have spent the extra money for no reason.
Additionally, many of these types of expenses aren鈥檛 a necessity. To ensure that you鈥檙e adequately prepared for a recession, it鈥檚 better to divert these funds to your emergency savings.
The bottom line
As Benjamin Franklin famously stated, 鈥淚f you fail to plan, you are planning to fail.鈥�
It鈥檚 very possible that Canada could see a recession in early 2023. Even though it鈥檚 not a guarantee, you should still prepare your finances by cutting down on unnecessary spending and building your savings.
Even if the economy changes from its current course, then you鈥檒l still be better off for your preparation, as you鈥檒l have saved more and increased your financial value.
Christopher Liew is a CFA Charterholder and former financial advisor. He writes personal finance tips for thousands of daily Canadian readers on his .
Do you have a question, tip or story idea about personal finance? Please email us at dotcom@bellmedia.ca.
