Navigate any storm: your guide to recession-proofing your finances

Ever feel that ripple of uncertainty when the news talks about the economy? It's natural to wonder how market shifts might impact your hard-earned savings. But here’s the empowering truth: preparing your finances for an economic slowdown isn't about predicting the future; it's about building a robust financial fortress that can withstand whatever comes your way. Whether experts are whispering about a potential recession or you just want to feel more secure, proactive financial planning is your best defence.

At Questrade, we believe in empowering every Canadian with the knowledge and tools to face any economic climate with confidence. Understanding how to prepare your finances for a recession in Canada isn't about fear; it's about strategic action.

This guide will serve as your practical recession survival guide, walking you through essential steps for economic downturn preparation and how to boost your overall financial resilience in Canada.

Let’s dive into strategies for effective financial planning in a recession, so you can help protect your investments and financial house in a recession.

What is a recession?

A recession is a significant decline in general economic activity, typically visible as a slowdown in production, employment, income, and trade, lasting for more than a few months. In Canada, economists often look at two consecutive quarters (six months) of negative Gross Domestic Product (GDP) growth as a general indicator of a recession. It's part of the natural economic cycle, and while it brings challenges, understanding what a recession is—is the first step in effective economic downturn preparation.

Why prepare your finances for an economic downturn?

Proactive preparation isn’t about panic; it's about control and protecting your financial well-being. Thinking ahead allows you to navigate challenging economic times with greater calm and confidence. It helps you:

• Reduce stress: Knowing you have a plan minimizes anxiety when economic news hits.
• Avoid rash decisions: A solid plan prevents panic-selling investments or making hasty financial choices.
• Protect assets: Strategic moves help safeguard your investments and savings from significant losses.
• Maintain stability: Keep your household finances steady even if income or expenses shift.
• Find opportunities: Downturns can present unique buying opportunities for those who are prepared.

This proactive approach is fundamental to effective financial planning and building true financial resilience, even during a recession.

Step 1: Fortify your emergency fund

What is the most crucial step for recession survival? Building or reinforcing your emergency fund is often cited as the most crucial step in any recession survival guide. This dedicated savings cushion is designed to cover your essential living expenses during unexpected disruptions, like job loss or a significant income reduction.

For economic downturn preparation, aim for three to six months of essential expenses, but consider up to 12 months if your job stability is lower or you have many dependents. This fund acts as your immediate financial buffer, helping to protect your hard-earned investments from being liquidated at unfavourable times.

• Target amount: 3-6 months of essential living expenses (rent/mortgage, utilities, groceries, transportation, insurance, minimum debt payments).
• Where to keep it: Tax-Free Savings Accounts (TFSAs) or a non-registered account (Cash or Margin) are great options. They offer liquidity and stability, ensuring your money is there when you need it most. Do your best to avoid any super risky investments for this fund.

Step 2: Tackle high-interest debt

How does debt impact your financial planning in a recession? High-interest debt can become a significant burden during a recession. When income is uncertain, interest payments can quickly spiral, leading to greater financial strain.

• Prioritize high-interest debt: Focus on paying down credit card balances, personal loans, or lines of credit first. Their high-interest rates can quickly erode any savings or investment returns you might have.
• Create a debt repayment plan: Develop a clear strategy, like the snowball or avalanche method, to systematically reduce your debt. Every dollar you free up from high-interest payments increases your monthly cash flow and overall resilience.

Step 3: Optimize your investments

Protecting investments during a recession is about strategic thinking, not panic. While a recession can feel unsettling, it’s crucial to avoid emotional decisions like selling everything off. This can lock in losses and cause you to miss the eventual market recovery. Instead, focus on these strategies for protecting investments recession:

• Review diversification: Ensure your portfolio is well-diversified across different asset classes, industries, and geographies. A diversified portfolio is more resilient to downturns.
• Rebalance strategically: Use rebalancing opportunities to trim overperforming assets and buy more of those that are undervalued, bringing your portfolio back to your target allocation.
• Control costs: High fees eat into returns, especially when growth is slower. Questrade's $0 commissions on stocks and ETFs help you keep more of your money working for you.
• Stay invested: Historically, markets recover. Maintaining a long-term perspective and staying invested through downturns is often key to capturing future gains.

Step 4: Diversify income & upskill

Beyond managing your money directly, recession preparation involves bolstering your ability to earn.

• Diversify income streams: Consider a side hustle, freelance work, or monetizing a hobby. Having multiple income sources reduces reliance on one primary job.
• Upskill and reskill: Invest in professional development. Acquiring new skills or enhancing existing ones can make you more valuable in the job market, boosting your financial resilience in Canada during challenging times.

Step 5: Review your budget & cut costs

A thorough budget review is a cornerstone of any recession survival guide. It allows you to understand your current spending habits and identify areas where you can reduce expenses to build financial resilience.

• Distinguish needs vs. wants: Be honest about essential vs. non-essential spending. Temporarily cutting back on "wants" frees up cash flow.
• Find efficiencies: Look for ways to lower recurring bills like subscriptions, insurance, or utilities.
• Create a lean budget: Develop a budget that prioritizes essential needs, ensuring you can cover core expenses even with reduced income.

Your path to financial resilience

Understanding what is a recession and taking proactive steps is key to navigating economic uncertainty. Economic downturn preparation isn't about fear; it's about empowerment. By fortifying your emergency fund, tackling debt, optimizing investments, diversifying income, and reviewing your budget, you’ll be well on your way to building true financial resilience.

At Questrade, we provide user-friendly platforms and low-cost investment options to support your financial planning. Take control of your financial future today. Open an account.