Five Ways To Prepare For A Recession

With what may be a recession just around the corner, here's how to bullet-proof your finances!

Is Britain headed for a recession? As Fool writer David Stevenson argued here, the signs are certainly worrying. I've lived and worked through three recessions (1980-82, 1990-91, and 2001-2002), even losing my job in one of them. While recession itself is by no means certain, what is certain is that if recession does lie ahead, the prospects could be ugly: Britons' personal debt has now soared to more than £1.3 trillion, leaving us collectively more exposed to a downturn than ever before.If recession comes, the scenario to avoid is one that unfortunately traps countless families each time that there's a downturn. The story is sadly familiar. Through job losses or reduced hours, income suddenly plummets, leaving personal finances hopelessly exposed to high levels of household expenditure and debt payments. Worse, asset prices fall, making it harder to raise money by downsizing or selling those cars, expensive consumer electronics and other pricey items that the debts represent.Here's how to minimise the risk of being caught in the trap. Unfortunately, unemployment and shorter hours may still beckon, but at least your finances will be bullet-proof!1. Defer or delay big purchases, unless paying by cashPerversely, Christmas seems one of the cruellest times of a recession: expensive celebrations, expensive presents, expensive new household appliances...and then the axe falls in January. (January 11th, in my own case!) But, irrespective of the time of year, a recession, or imminent recession, is a time to be prudent. Don't add to debts, and don't push the boat out with a lavish lifestyle and all its trimmings. The golden rule is simple: unless you can pay for it in cash -- and pay for it comfortably -- then think long and hard about buying it.2. Build an emergency fundIf the axe falls, it might be possible to find a new job almost immediately, but you shouldn't be complacent, because if no jobs are available there will still be bills to be paid. Building a cash cushion to tide you over for a few months of lean times is good basic financial common sense, but especially so if a recession is likely. Visit the Fool's savings centre for tips on where to accumulate that cash so as to earn the highest rate of interest for your emergency fund.3. Live a more frugal lifestyleHow would you manage on 30% less income -- or worse? Cutting out excess costs not only helps you to build that emergency fund faster, it also reduces the inevitable financial 'change of gear' should the worst happen. Running lean and light already, you'll adapt to your new circumstances more quickly and, in the meantime, you're building that emergency fund all the faster.The Fool's Living Below Your Means board is always packed with good advice on living frugally. Here and here are two recent articles on cutting your household costs.4. Reduce your debt burdenOur Get Out Of Debt centre is one of The Fool's most popular areas. But if recession is around the corner, reducing our monthly outgoings takes on a whole new dimension. Don't add to your existing debts, and pay off as much as you can of your present debt burden. By following the guidance above and in the debt centre, you'll certainly be in good shape to do just that.5. Boost your incomeExtra income helps you build that emergency cushion faster, pay off debts faster, and pay for big expenses in cash (instead of borrowing), too. In part, there's an element of 'get it while you can', here. Extra shifts, extra overtime, and payment offered for undertaking extra responsibilities -- all of these might this time next year seem a distant memory. But there are longer-term ways of boosting your income. And don't forget the hidden benefit of a second source of income, as many a poster on our Dealing with Debt board has discovered, one of the great perks of a second job is that while you're working at it, you can't go out and spend money at the same time!> Read about 10 Ways To Cut Your Food Bill.