Michela Allocca is a personal finance creator who shares tips for managing money through her social media pages.
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In a recent post on her Instagram @breakyourbudget, she offered viewers four tips to help them handle their finances and prepare for an uncertain economy or even a recession.
Why Recession Prep?
So why prepare for a recession? According to Allocca, in recent years there has been a noticeable rise in financial anxiety among people across the U.S. This isn’t necessarily confined to any particular age group, income bracket or industry — concerns are universal. Record inflation has impacted essential expenses like rent, groceries, gas, insurance and home prices.
Recently, an economic indicator known as the Sahm Rule was triggered, signaling that the country may be on the verge of a recession. The Sahm Rule is used to detect the start of a recession quickly. Developed by economist Claudia Sahm, it focuses on changes in the unemployment rate.
The rule states that if the three-month average of the national unemployment rate rises by 0.5 percentage points or more above its lowest point in the previous 12 months, it signals the beginning of a recession. A recession could mean more layoffs and a tougher and more competitive job market, so preparing as much as you can can be a good idea.
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Michela Allocca’s 4 Tips for Recession Prep
1. Take a Financial Snapshot
Allocca suggests starting by getting a firm understanding of your current financial situation. “Review your accounts and get clear on how much you have and where,” she said.
Start by listing all your bank accounts, investment accounts, retirement funds and other assets. Then list all of your debts, such as credit cards, student loans or mortgages. This gives you your net worth — the difference between your assets and liabilities.
Next, assess your cash flow — the amount of money coming in and going out of your accounts each month. List all sources of income, including your salary and any freelance work or side gigs. Then, compare that to your expenses by reviewing bank statements and receipts. You should categorize your spending into essentials like housing, utilities and groceries, and non-essentials like entertainment and dining out.
By auditing your outflow, you can identify areas where you might be overspending. If you find places where you are spending more than you need to, you can cut back and put that money aside for a rainy day.
2. Audit Your Cash Position
Allocca explains that it’s important to decide where you keep your money, especially when the economic situation is more uncertain. She describes this as auditing your cash position. Allocca lists two options for where to keep cash.
One option is a high-yield savings account. Allocca says that this is “a great place for your emergency fund or any other short-term cash savings.” An emergency fund should be one of your top priorities — you’ll need it if you lose your job or have unexpected expenses. By keeping your emergency fund in a high-yield savings account, you make sure that your savings keep pace with inflation to some extent and that your money remains easily accessible when needed.
Another option is a certificate of deposit. A CD is a savings product where you deposit money for a fixed period in exchange for a guaranteed interest rate. According to Allocca, a CD “is an option if you have additional cash that you know with 100% certainty you will not need for the defined period you select.” CDs typically offer higher interest rates than regular savings accounts, but your money is locked in until the maturity date.
3. Reevaluate Your Financial Goals and Spending
Allocca recommends taking a closer look at your financial goals and adjusting them. There are three areas she focuses on:
- Emergency fund: Prioritize building an emergency fund with at least three months’ worth of expenses saved in a high-yield savings account. An emergency fund provides a cushion against unexpected expenses like medical bills or job loss.
- High-interest debt: Work on paying off any debt with an interest rate higher than 7%. High-interest debts, such as credit card balances, can quickly become unmanageable if they aren’t paid off on time.
- Other debt: Allocca suggests, “If you have any other debt, it might be worth prioritizing over other savings goals at the moment.”
To manage your spending, Allocca recommends trying a spending detox. This is a period of time when you eliminate any expenses that are not essentials. By cutting out non-essential spending temporarily, you can identify what you can actually live without.
4. Uplevel Your Skillset
Improving your skills can increase your job security and open up new opportunities. Allocca emphasizes that “skills are corporate currency.” She recommends that you focus on both in-office skills and outside-office skills.
In-office skills are abilities related to your current job or industry. You can develop these through on-the-job training, taking on additional responsibilities or professional development opportunities. To identify which skills to focus on, look at job descriptions for positions you would like to work in someday.
Outside-office skills are ones that can be leveraged in the freelance market or used to start a side business. Allocca explains, “These include skills like copywriting, social media, design, etc., or they could be passion-based skills like personal styling or home organization. … The goal is to be really good at something outside of the office that you could leverage (if you want) to make money.”
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This article originally appeared on GOBankingRates.com: 4 Tips To Handle Your Finances in an Uncertain Economy, According to Money Expert Michela Allocca
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