Downturns are unavoidable in every economic cycle, but they become more probable when U.S. monetary policymakers are actively reducing liquidity in the financial system. The Federal Reserve authorities have increased borrowing costs in the shortest period since the 1980s, propelling them in March to a fresh target range of 4.75-5 percent following a period of near-zero rates just twelve months prior.

Economic downturns frequently strip away the stability in the economy, resulting in underperforming investments, declining asset prices, diminished employment stability, etc. Below are 5 measures to ready your finances for an economic downturn and the catastrophic outcomes it may bring:

1. Revise your budget

Maintaining a vigilant eye on your finances is crucial for maintaining sound financial health, particularly when there is a surge in inflation.

When preparing for an economic downturn, it is crucial to prioritize. To begin, scrutinize your budget and distinguish between necessary expenses, such as food, housing, transportation, debts, and non-essential spending. Then, assess whether there are any opportunities to curtail or postpone your non-essential expenses. What would be the effect on your standard of living? Sometimes, delaying or reducing significant expenditures, such as a new car or overseas vacation, may not be as daunting as it appears and can significantly boost your short-term savings.

• Save for emergencies

Despite a significant decrease in the personal savings rate since its peak during the pandemic, it is still crucial to prioritize maintaining a sufficient emergency fund. This can assist in staying financially stable during unexpected situations, such as losing a job or experiencing a medical emergency in the family.

It is recommended to have a minimum of three months’ equivalent of domestic expenses saved in a savings or checking account. If you are the only breadwinner in your household or work in an industry that is prone to layoffs, it is advisable to save at least six months’ worth of expenses. For retirees, having up to a year’s worth of expenses in liquid assets, can prevent the need to sell long-term investments when the market is down. This can avoid losses and reduce future income.

• Deal with Debt First

Lately, the Federal Reserve has been implementing a monetary policy to curb high inflation which has resulted in a rise in interest rates. This increase in rates could be unfavorable for borrowers, especially those with revolving debts like credit cards.

If you are facing multiple debt balances, it might be worthwhile to contemplate a debt consolidation plan: You can opt for a single loan at a fixed rate and utilize the funds to pay off multiple other high-interest balances. This can have a twofold advantage of simplifying your payments and potentially decreasing interest expenses.

• Investing can reap unexpected benefits

During times of market turbulence, it may be tempting to engage in selling. It can be difficult to witness one’s portfolio losing value without any indication of when it will recover. However, making a hasty decision to cash out can often result in losses. If one waits years to reinvest, readjustment of the portfolio may be necessary.

Investors who choose to sell assets and wait for the market to stabilize will find it difficult to predict the right time to re-enter. The best days in the stock market’s history have often followed its worst days, with little to no warning for investors.

• Stay focused

During challenging economic periods, a monetary strategy can assist you in enduring the hardship and maintaining your focus on your objectives. While devising a financial plan, it is usually beneficial to integrate hypothetical situations to anticipate potential outcomes and provide you with an understanding of the effects of market shifts on your finances. This will enable you to respond calmly if situations do eventually take a negative turn. Frequently, the most advantageous actions to take during uncertain times are minor and well-considered. However, without a financial plan in place, determining the ideal approach can be problematic.