During Recessions, people have fears. The stock market is crashing, people are losing their jobs, and others have less money to buy essentials. It is a time of chaos and turmoil. These times do not always have to be like that. If you learn how to prepare for a recession, you will have the tools to stay calm in the storm.
Recessions are not always as bad as the media makes them sound. We all think of the great financial crisis of 2008 or even the Great Depression of the 30s. These are significant events that have massive impacts on people's lives. You could lose money, a job, and a sense of security.
Being prepared in the face of dire economic times is a way to stop the bleed, overcome adversity, and make sure your finances are in the right spot.
Let's talk about what a recession accompanies.
What is a Recession?
Economies move up and down, and there is a cycle of growth and nongrowth. Recessions are a downward trend in the business cycle which comes with a drop in production and unemployment. People then will tend to spend less during these times of economic downturns.
You can see this in recent history with the roaring 20s had significant growth in the U.S. economy then it was followed by the Great Depression.
In 2008, the Great Recession dropped the market and left many homeless people as the recession affected banks, mortgages, and housing prices. It was followed by one of the longest bull markets to be seen that lasted over ten years.
In 2020, the Coronavirus pandemic created a great fear amongst people dropping the stock market down 35% but quickly bouncing back.
Recessions bring on a lack of economic growth that brings on economic downturns. The gross domestic product or GDP is often down for the time being. During this period, unemployment rises, values of stocks and businesses drop, and property values come down. These are tough times for people and therefore need to learn and modify their spending plan.
When preparing for a recession, you must do a couple of things to avoid selling your investments.
Preparing Your Finances
It is vital to prepare your finances for any uncertain times. Anything can happen, so you must make sure you are preparing for a recession. This could be a financial collapse, a great fear like the Covid-19 pandemic, or even a war that could disrupt the world.
7 Steps on How to Prepare for a Recession
Here are seven steps on how to prepare for a recession. These steps will train you in dire circumstances and equip you to handle uncertainty and fears that the economic market may cause.
1. Build an Emergency Fund
Building an emergency fund cannot be overstated. Typically, people talk about having anywhere from three to six months of living expenses that can help you through a loss of a job or economic issues that may prevent you from paying certain costs.
During a recession, you may be without a job longer than expected, so you may need some more savings to go along the way to help you.
Some people like to live dangerously with having their funds invested in the market or even over-leveraging themselves. Take a chance to make sure you have enough cash to pay for the necessities in life like housing, food, transportation, and health. Creating an emergency fund sitting in the bank is an excellent way to secure your future during these challenging times.
You will not have to stress as much if you can have an emergency fund that helps supply these vital needs when a job loss happens or even a recession. The emergency fund is like a safety net that allows breathing room.
2. Pay Down Debt
Debt can be a crippling part of life. Having unnecessary debt like credit card debt or even high-interest loans can put you into a high-pressure situation if a recession. If you want to prepare for a downturn, you must start paying down the high-interest debts.
These debts will be something that can strain your budget in case a job loss happens, or passive income may stop producing income. At this point, it is best to pay off as much as you can. Get rid of the debt to be stress-free.
Becoming debt-free will open up your financial world to new opportunities to help make you money. Working on paying off your student loans or getting rid of any credit card debt can allow you to have peace of mind during a recession.
3. Budgeting Within Your Means
The saying goes, “spend less than you make.” Living a life where you spend less than you make you opportunities to save more and invest more of your money. Part of preparing for a recession is creating a budget that represents spending less than you earn.
The concept surrounds the idea of living below your means. As we make money and grow our incomes, we want to inflate our lifestyle more. It makes sense. The more you drive, the more money you have that can be spent on goods you would like to have.
In a recession, there is the chance that you will no longer make as much as you once did. That means your budget must change, your lifestyle must change, and these changes can be complex.
Through budgeting, you can create a plan for how you spend money. As you make more money, you can keep your budget the same but allocate more money towards savings and investing. The budget will help you reduce spending on unnecessary items. When a recession happens, you will be prepared for times of less expenditure.
4. Have a Long Term Investing Strategy
A long-term investment strategy is a key to being prepared in a recession. If your money is invested in high risks assets, that money may become worthless during a crash in the market. People want to achieve high rewards, but having a long-term investing strategy can help blunt the market's fall.
Creating a portfolio of index funds or low-cost mutual funds can help create a stable investing portfolio that will help outlast a recession. Recessions may last a year or two, and then the market volatility will be over, and your investments will be back going up.
If your money is a more high risk, it may be hard to get the returns back up higher. So having some mutual funds and index funds for the long term can give balance and security in market volatility.
5. Work a Recession-Proof Job
Your employment is significant to help avoid a major financial collapse. Stable employment allows you to have income constantly coming into your pocket. Having a job that is not very useful in a recession can lead to job loss, long-term unemployment, financial stress, and insecurity.
Working in a recession-proof profession helps create an adequate revenue stream. Here is a nice list of some great recession-proof jobs, and you can see how these jobs will continually be in use even in bad economic times.
These can be jobs like nurses, teachers, plumbers, and firefighters. They are each essential to daily living, and therefore their jobs are not affected by a downturn in the economy.
6. Create Multiple Income streams
When you are learning how to prepare for a recession, you must cover expenses. Having one income stream is good, but having multiple income streams is much better.
It is said that the average millionaire has seven different income streams. With multiple income streams bringing in income every month if one dries up, a couple more help you out along the way.
Building multiple income streams can help you create avenues to obtain income if one job does not work. Typically, we all work our regular job. That is one income stream. Maybe you have a portfolio of stocks and funds that bring in dividends that help fund you as well. If the job goes away, you can rely on other streams to get you by until the market is back up rolling and you can find other employment.
Fear of not having money is an enormous stressor that affects families and individuals. Creating multiple income streams can minimize that fear in the case of financial instability within your country.
Try to create more income streams.
7. Live Frugally
Lastly, work on living a more frugal life. It may be hard to spend less than you earn, but you will be forced to live on less if a job loss happens. It is better to prepare for a recession now than wait until one happens.
It starts with frugality. If you can live frugally, you will not have to compromise on certain expenses when less money is in your pocket.
A frugal life prepares your mindset for living on less. That is great because it allows you to have less stress when there is less money. The emergency fund does not have to be as large because you have learned to live on less.
What You Shouldn't Do in a Recession
Recessions bring on much uncertainty and stress. People think this is the end, or they know there are crazy times. During these times, people act a little rash and make financial blunders that can cause significant financial problems for the future.
So here are some things to avoid while in a Recession.
Make Big Purchases You Can’t Afford
As we live life, our lifestyles may inflate. We want a bigger house, a better car, and fun toys to use on the weekends like boats. During a recession is not a good time to upgrade. Yes, maybe your car has broken down, and you need to buy a new one, but having a car payment that is too high is not an excellent financial move.
Avoiding big purchases can help your financial situation in preparing for a recession. If there is all of a sudden a sizeable monthly payment is going to pay for that new large truck or BMW, and then you are let go of your job. Money will start to get tight. It is better to avoid some of these purchases until cash, and economic stability has returned.
The average person does not know how financial markets may think that recessions are a terrible time to invest money. They see the dollar losses and do not want to be a part of the loss, so they stop investing.
When you stop investing or even put your money into cash, it can push back your money and your financial security a couple of years. Those that continue to invest during a recession will be able to come out on top when the market goes back up.
Warren Buffett once mentioned the price of a burger. When the burger goes on sale, people want to buy it, but people will try to avoid it when the burger price increases. The opposite is valid with the stock market. When the prices of stocks go down, people try to avoid them, but people want to buy in when they go up.
It makes sense to buy things on sale instead of at a higher price. As you invest in the market during a recession, you will purchase many items on sale. When the market goes back up, that is when the patience and discipline you used during the recession will pay off in significant financial wins.
What Happens During a Recession
During a recession, many things usually occur that impact the lives of others. Jobs are lost due to the lower incomes of businesses. With less money to pay employees, companies must decide on hires.
Some jobs may reduce employees' hours to avoid paying them as much. Fewer hours means less money in your pocket.
The Federal Reserve will start to cut interest rates. They hope that cheaper money to borrow will allow businesses and individuals the ability to make investments, grow, and build upon their foundations. More money being spent enable the economy to thrive and get back on its feet.
Being prepared for the next recession takes many steps. These steps will help ensure that you will have more peace of mind when tough times occur. Learning more about personal finance will allow you to have more knowledge of taking advantage of a recession instead of stressing about how much cash you may or may not have.
It is time to take some action before a recession occurs. Start living a more frugal life, create a budget, save money, and invest for the long term. All of these actions will allow you to survive the next recession.
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.