How to recession-proof your finances
Man holding a credit card and a smartphone

This has been a wild year financially for Canadians. Inflation hit a 40-year high in 2022. The Bank of Canada has been jacking up interest rates. We haven’t recovered from supply chain challenges created during the COVID-19 pandemic, causing shortages in everything from children’s Tylenol to butter. So what’s a person to do when faced with a possible recession?

A little thoughtful preparation can go a long way. Think of it like this: If winter’s coming and snow is likely, it’s a good idea to at least own a shovel. You don’t know how bad it will be, but you’ve got the right tool ready to go no matter what.

These top tips will help you better prepare for whatever lies ahead: from a full-on recession to a very long period of financial stress.

Avoid credit card and high-interest debt at all costs 

When interest rates go up, so does the cost of borrowing any money. (Unless it’s interest-free, in which case — good for you!) Credit cards and other types of consumer debt with high interest only become even more expensive during a recession-esque financial climate. Even worse, it creates a slippery slope: higher interest rates make it more costly to pay off interest, leaving you with less cash to pay off the principal, leading to more interest, and on and on.

We know that whenever cash flow is tight, it may be more tempting than usual to dip into your credit card to pay for, well, stuff. Of course, traditional advice as simple as “just spend less!” is easier said than done, but this is one case where it’s particularly true. The less you put on your credit card during times of higher interest, the better off you’ll be.

One tactic is consolidating existing high-interest debt with a lower-rate balance transfer card. If you’re only paying the minimum off your credit cards each month, this is an excellent way to ease some cash flow and lower interest rate payments. There’s one caveat: you need to avoid using the new credit to spend more and further weaken your position.

In case of emergency 

When the markets get volatile, hoarding some cash seems like a natural next step. While you should avoid converting all your investments to cash (more on that in a bit), you want to ensure you’ve got one of the cornerstones of a solid financial foundation: the emergency fund.

In a recession, a healthy amount of cash stored away in a very liquid form is your friend. Around six months of total living expenses in a high-interest savings account is a great place to start. Yes, the general rule used to be three, but in times of uncertainty (like a global pandemic followed by a series of financial crises), you can create more certainty with six. If that’s not feasible, with prices skyrocketing and incomes staying the same, then saving anything you can is the next step. Any kind of financial cushion is better than none at all.

If you already have a six-month emergency fund (good for you!), you might want to boost it up with a few extra months for good measure, but avoid the temptation to sit on a massive pile of cash. Currency always loses value over time, thanks to our good friend inflation. Market lows are the best time to invest if you can afford them without compromising your financial security.

What goes up must come down — and go back up again

If you can afford it, don’t change a thing. Investing is a long game. Unless you’re a financial pro and actively try to play and time the markets (if you are, good luck on that right now), for most of us, the strongest bet is to invest as much as we can for as long as we can. Over time, the magic of compound interest grows that money into more money.

But wait, you’re wondering, “Aren’t I losing money during a recession? Don’t I want not to be losing money?” Fair question. The answer: while, yes, the value of your investments — and the money within them — goes down sometimes, it also, when you wait it out, almost inevitably goes back up and eventually grows.

After every single recession that Canada has experienced in the last 55 years - and there have been four big ones since 1976 - an economic expansion has followed where investment growth more than made up for losses. Does it happen overnight? No. Does it happen in the end? Yes. 

If you’ve got time - say you’re planning on retiring in more than seven years - then the best strategy is simply to wait it out. Let your current investments ride and wait for recovery. If you can afford to continue investing, then when the market dips, you’re buying more for less. Though it’s worth less right now, it will be worth more in the future, and you’ll have paid less for it. That’s the investing dream scenario.

If you have less time, like you’re planning on retiring in seven years or fewer, you need to be more careful. We don’t know how long an economic downturn will last, and you could get caught in a worst-case scenario of wanting to retire when your investments are at their lowest point.

Stay as confident as you can

When the markets go south, there are some mindsets you can turn to as your north star. Sure, there are many strictly financial reasons when you might want to change how you manage your money before or during a recession. But, sometimes, people take action based on fear, not reason, which can harm them.

●      Remember your long-term plan

As we talk about above, Canada has made its way through every recession in most of our lifetimes and come out stronger again on the other side. It can feel bleak in the middle of it but remind yourself that you’re investing long-term, and it might take a while for things to turn around. Historically, they’ve always turned around. 

●      Avoid financial doom scrolling

This goes for a lot of things, but if you’re constantly searching and flipping through negative financial news — and there’s tons to go around right now — you might be freaking yourself out more than necessary.

This is a #1 mental health tip at any time, but keep a close eye on how much time you spend reading about the economy and how it affects you. Can you feel yourself physically and emotionally stressed out? If so, give yourself a limit, set a timer on your phone, delete apps or tabs from your browser — anything to give yourself a bit of breathing room.

Schedule a time in your calendar, maybe once a week or twice a month, to intentionally and mindfully catch up on financial news in a more proactive way. Then you won’t miss out on anything crucial, but you won’t be falling into an ever-spiralling hole of financial news disaster.

If you’ve followed some of the steps above to define your strategy, avoid extra debt and clearly outline your goals, then you’ve done all you can. The markets will go up or down (and down, and then down some more), and maybe a full-blown recession will come. You can’t control that. What you can control is your own financial setup and your mindset. If you’ve done the work of preparing your finances, then congratulate yourself and settle in. It’s going to be a bumpy ride.

Jeremy Elder is a Toronto-based content marketer and copywriter with over a decade’s experience telling stories for some of the world’s biggest brands. He’s an expert at finding WiFi wherever you least expect it.

Jeremy Elder is a paid Sonnet spokesperson.
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