Tips to prepare for a possible recession in Canada

Although a recession in 2023 is unlikely, economic indicators indicate that we are most likely to face a recession early next year.

On December 7, the Bank of Canada raised its overnight interest rate by 50 basis points in an attempt to cool recent inflation. This, combined with RBC analysts’ predictions for a recession in the first quarter of 2023, hints at the possibility of a recession next year.

Regardless of whether the country is in a recession in the near future, you should still create a financial action plan to help mitigate the risk. Below, I’ll share some practical tips to help you and your family prepare, but first, learn exactly what to expect during a recession.

What happens in a recession?

Bank of Canada Governor Tiff Macklem commented in a public statement on November 14 that “Slowing economic growth will disproportionately affect our most vulnerable households. High inflation and high interest rates to combat inflation add to the burden on our lowest income households.”

During a recession, the country’s GDP tends to decrease as some industries earn less revenue.

Some of the potential outcomes of a recession are:

  • Increasing unemployment and job loss

  • Consumers reduce spending, causing damage to businesses

  • Falling prices in the housing market

  • Stock market pullback, leading to investor losses

Financial Action Plan Advice for a Potential Recession in 2023

When it comes to your personal finances, you should prepare for the worst. With Canada’s top economists predicting a recession, consumers should take note and plan accordingly.

Here are some possible steps you can take to limit the impact of the recession on your finances.

1. Assess your investment risk

Now is the time to review your investments to see if you are satisfied with the level of risk you face.

Higher risk investments are likely to cause more investment losses than lower risk investments. The classic example of this is higher-risk investments like stocks than lower-risk investments like bonds. During a recession, stocks typically suffer larger losses than bonds.

This can cause many sleepless and stressful nights if the value of your portfolio starts to drop too low during a downturn than your risk tolerance allows.

Take the free online investor questionnaire to see if your current investments match your risk tolerance. If you’re taking on too much risk, consider tweaking your portfolio to something lower risk, such as a fixed-income account, GIC, or high-yield savings account.

2. High-interest debt repayment

If you have variable-rate open lines of credit, expect them to increase during a recession. Thanks to recent central bank rate hikes, Canadians are seeing much higher interest rates and increased fees imposed by their creditors.

Before interest rates rise too much, you should pay off as much debt as possible. The lower your principal balance, the less interest you will have to pay.

It’s best to be proactive here, as you’re less likely to have extra money during a downturn.

3. Build Your Emergency Savings

Rising inflation and higher prices for daily necessities and services can jeopardize your savings. With the possibility of a recession in the next few months, this is something to be extremely wary of.

Instead of burning through your savings, do your best to cut spending and use that money to build up your emergency savings. If you’re not sure where to start, take a look at three big areas where you can cut spending; your housing, transportation or food. I find that most people often have an area where they overspend.

Economic downturns can often lead to unforeseen situations, such as job losses, reduced working hours, and pay cuts. If you are looking for a bonus, this can also be postponed.

The more you save, the easier it is to deal with these sudden changes so you don’t miss your bills or find yourself unable to provide for your family.

4. Optimize Your Resume

Unemployment and reduced working hours are common during recessions, when businesses cut non-essential positions. One of the best ways to improve your job security is to continue to provide value and go above and beyond the basic requirements of your position.

However, you should also be prepared for the possibility of losing your job. 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, making sure you have a backup plan if your job goes south.

5. Re-evaluate your monthly budget

If you don’t have a clear monthly budget, you’re likely to spend more than you need to. Whether you’re single or live in an economic household, I recommend sitting down and reviewing your income and expenses to create a budget that will allow 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 that can cut unnecessary spending.

6. Postpone expensive purchases

If you’re thinking of buying a new car, a recreational vehicle, remodeling your home, or taking an expensive vacation, it’s best to put off unnecessary spending. If a recession hits, the cost of many of these things can drop naturally, which means you’ll end up spending extra money for no reason.

In addition, many of these expenses are unnecessary. To ensure that you’re fully prepared for a recession, it’s better to move these funds into your emergency savings.

Key point

As Benjamin Franklin famously said, “If you don’t plan, you’re planning to fail.”

Canada will most likely see a recession in early 2023. While that’s not a guarantee, it’s still a good idea to prepare yourself financially by cutting unnecessary spending and accumulating savings.

Even if the economy changes from its current course, you should be better prepared as you will save more and increase your financial value.

Christopher Liew is a CFA Charterholder and a former financial advisor. He writes personal finance tips for thousands of Canadian readers daily on his Wealth Awesome website.

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