March 29, 2023

How do I prepare for a recession if I have debt?

A recession means economic hardship for many and can tip some over the edge. We look at the best ways to manage debt both before, and during a recession.

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How do I prepare for a recession if I have debt?

Woman standing in front of stock listings and worrying about her debt and a recession

Both inflation and interest rates are up, household debt is at an all-time high, and most analysts are forecasting a recession. It seems like everywhere you turn, someone is talking about an economic decline. 

If you have debt, you might be worried about how you’re going to manage if the economy takes a turn. Whatever your situation, there are ways to handle debt both before and during a recession. 

What is a recession?

The answer to this question can be confusing, so we’ll make it as simple as possible here. 

A recession is a period of significant economic decline. The economic downturn must last for several months to qualify as a recession. Some last for years. Employment levels, economic output and consumer spending all tend to drop during a period of recession. 

There are various things that can cause a recession – high inflation and rising interest rates being two of them. 

There are other causes of recession too that are relevant for 2023: 

  • Excessive debt. When many people are unable to meet their financial obligations, it can result in bankruptcies and trigger a chain reaction of economic instability.

  • Asset bubbles. This is when asset prices rise rapidly over a short period, but these price rises do not accurately reflect the real value of the asset. Eventually, if these asset prices crash, it can be a cause of a recession.

  • Sudden economic shock. In many ways, the economy is still reeling from the COVID-19 pandemic, and other world events continue to disrupt the economy and push inflation higher.

This is why many predict that in 2023 the economy will enter a recession.

So, what does this mean for regular Canadians?

Looking to reduce debt? Explore your options with us.

What typically happens during a recession?

What typically happens during a recession?

  • Consumers, businesses borrow less and spend less money
    Recessions create an environment of uncertainty, as a result, people and businesses are less willing to take on debt or spend because they are unsure if they can afford to repay the money.

  • Businesses make cuts and lay off workers
    As people spend less, this affects businesses who then lay off workers to cut costs.

  • Unemployment goes up
    With more people being laid off, the percentage of the population who is unemployed rises and so do insolvencies, that is, the amount of people having to declare bankruptcies or file consumer proposals

On the ground, a recession means all sorts of challenges.              

For many people a recession may mean losing your job, and it can be even harder to find a full-time job during a recession. One silver lining with the current economic crisis, though, is that the employment rate is strong. According to Statistics Canada, Canada has added jobs in both January and February of this year and unemployment remains just above an all-time low. There are worrying signs though. 

Insolvencies increased dramatically in the past year – up 25% year over year. 

So, if you have a lot of debt, what should you do? Both now, and during a recession, here are some important things to keep in mind.    

Focus on your own situation

Focus on what you can control: your budget, your income, and your debt. 

In many ways, recessions are brought on by a collective shift in spending habits: consumers spend less and borrow less, which has a ripple effect throughout the whole economy.  

However, spending and borrowing less is exactly how you should be preparing for a recession.  

Right now, prior to a looming recession, is the time to prepare, says Adam Cardwell, a Manager at Personal Debt Solutions.
“In these uncertain times, managing debt is already difficult.  During a recession debt can become even more burdensome with added factors such as rising interest rates, job security and difficulty obtaining credit. If there was ever a time to take stock of your finances, it's now.”

Using calculator to look at budget repayment options

Debt-to-income calculator

How do you know if you have too much debt? BDO’s Debt-to-income calculator can show you what your ratio is.

Calculate your debt-to-income ratio

Cut costs

This is the best thing you can do that will have a noticeable impact on your day-to-day financial situation. You’ll need a budget, there’s lots of strategies to choose from, so you can start unlocking savings.  

You can use BDO’s budget planner tool to help get you started.

If you’re looking for easy ways to eliminate spending here’s a few ideas: 

  • Cut a subscription you don’t need 
  • Price match at the grocery store 
  • Cook at home and limit going out for food 
  • Be mindful of energy and expenses at home: turn the heat down when no one is home, turn off lights, reduce water consumption, etc.  
  • Carpool or take public transit when possible
  • Change your phone or internet provider for a cheaper rate
  • Postpone any big ticket non-essential spending, such as a trip, have a staycation instead

No matter what the budget, everyone has ways they can save. One great strategy for saving money is to start being a disloyal customer

Spend and borrow less

One of the first things to do is to limit credit card usage and to try to pay off any monthly balances in full. 

This also means reevaluating major purchases you have planned. If you were planning on taking a trip this year, you may wish to rethink where you go. Scaling back your plans and doing something less expensive is a great way to save money and borrow less.

The same thing goes for any major projects or home renovations done this year. If your countertop will survive until next year, it might be better to wait until then to spend the money on that renovation.

Right now, should I save or make debt payments?

The answer to this will vary from person to person, but here are some important points to consider. 

It’s best to do both

The reality is that if you’re able to save and pay down debt at the same time you should.

The biggest financial threat during a recession losing your job. You therefore need to ensure you have savings AND room to spare on credit products in case EI doesn’t cover any shortfalls.  

If you have credit card debt, that means reducing your balance to a manageable amount where your monthly payments are affordable.  

It also means reducing the balances on more low-interest forms of credit, such as a home equity line of credit (HELOC). This will free up more space for you to borrow in the future if you have to. 

You also want to put whatever money you can into an emergency fund, so you don’t have to rely on credit straight away if you do lose your job.

Of course, not everyone can afford to do both. Our blog on whether to save or pay off debt can help you see which one makes more sense for you.

Seek new forms of income

If you have some time on your hands to take on another job it might be worth exploring the idea of gig work or freelance

Not all freelance and gig work has to be for a company. You can work for yourself. From tutoring to dog walking, the ideas for an extra stream of revenue are almost endless. 

You can take freelancing to the next level and create a side hustle. Side hustles can include driving an uber, or delivering food for a delivery app. 

It may also mean starting to work on something you’re passionate about with the hope it will eventually become your full-time job.

The easiest way to earn extra money, of course, is to sell your own stuff. If your house is full of things you no longer need you can put them up for sale online, or even have an old-fashioned yard sale to earn some extra money..

You can use any extra money you make to pay down or keep up with your debt.  

What if a recession pushes your debt too far?

For some people a recession will be the thing that pushes them and their finances over the edge, often because they lose a job through no fault of their own.

If you feel you’ve run out of ways to handle your debt on your own, there are solutions available. Book a free consultation with one of BDO’s Licensed Insolvency Trustee’s and we can assess your situation and show you a personalized program to get you out of debt. 

Do you have more questions?

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March 29, 2023

How do I prepare for a recession if I have debt?

A recession means economic hardship for many and can tip some over the edge. We look at the best ways to manage debt both before, and during a recession.

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