Recessions bring about fear, anxiety, and chaos within the markets. People start to freak out, sell their securities to go to cash, and hope their job is not eliminated due to poor economics. These fears and anxiety-driven actions can cause many to wonder how to prepare for a recession. It is not every day we go through turmoil, but recessions do happen from time to time.
The mainstream media makes bad news seem worse. It has been known to make us fear the worst, even if things are not falling all around us. The coronavirus pandemic has caused many businesses to close and brought about a high inflation rate that looks like a recession is on the rise.
Danielle Miura from Spark Financials says, “Even though a recession is unpredictable and out of our control, it is important to take extra precautions during this time frame.”
As a recession occurs, we must be vigilant in taking precautions to obtain a positive outlook on our future. Some of the critical steps on how to prepare for a recession would be having an emergency fund, diversifying investments, strengthening skills, living frugally, and paying off debt.
If these steps can be accomplished, you will have better opportunities when the economic climate is dim.
What is a Recession?
Recessions bring on various thoughts and patterns that project declining economic growth. Governments and financial experts track economic data trends to declare times of recessions.
A recession signifies a time of downward economic and GDP growth for two quarters. If the GDP creates negative growth for two consecutive quarters, that indicates a recession.
As many different factors occur through economic data, such as inflation, unemployment rates, and business outlooks, experts can figure out what causes these economic declines. Throughout the years, there have been periods of recessions that have been long and short.
The Great Depression lasted years that changed the views of people. The Great Recession of 2008 brought about a change in monetary systems.
As recessions happen, governments and experts continue to learn, adapt, and teach others how to prepare for the next one.
What Happens When a Recession Hits?
During recessions, businesses start to lose money. They will then begin to lay off workers to preserve more capital. Hiring will start to slow down, and unemployment will begin to rise.
GDP will start to have a downward trend that will cause the economy to falter. As job losses and fear of job loss happens, people typically start to hold onto their money more. Savings rates begin to increase, and less spending means the business will begin to lose money or not hit its goals.
As a result, businesses need to innovate. People will need to save more and spend less. The government will typically find ways to help people out.
Getting Your Finances Right
Being prepared for a recession helps when uncertainty happens. It is vital to create a plan, save for an emergency, live below your means, and create efforts to pay off debt. Without many things holding you back, you can take advantage of investment opportunities because you will have been prepared by getting your finances right first.
9 Steps On How to Prepare For a Recession
As you start to think about how to prepare for a recession, there will be steps to take to help weather the storm. Each step is just a way to get your finances in the right place. Many financial advisors and planners have offered these tips to help guide you on your path.
Build An Emergency Fund
“Building up your emergency fund is one of the best things you can do to prepare for a recession. If you need to use it, you'll be happy it's there if you don't need to use it. it's unlikely that you'll be upset about having a large pile of cash available.”Michael Reynolds from Elevation Financial
One of the most important things to get right is having an emergency fund.
The thought of losing a job does not bring about any good news. Preparing for the worst could mean building an emergency fund that helps fund our lives until the next job opportunity.
An emergency fund is vital to surviving unnecessary costs or job loss as you prepare for a future recession. Typically, it is better to have an emergency fund that can give you three to six months' expenses.
If there is a sudden job loss, that emergency fund can help you get back on your feet for those three to six months as you look for future employment.
The emergency fund should be the cornerstone of any financial plan. It allows you breathing room and creates peace of mind in uncertain times. Start building that emergency fund to make a wealthier tomorrow.
Pay Off Debt
“Prepare by prioritizing paying off any high-interest debt first.”Myra Alport from Fem Powered Money.
Having debt is not necessarily a bad thing. Many people have a mortgage on their homes which is not bad debt. Before the Federal Reserve started raising the interest rates, you could get a great interest rate for a mortgage, which is excellent. Rates have risen, and therefore it is prudent to pay off any high-interest debt, such as credit card debt. Credit card companies will continue to raise their interest rates creating even higher debt.
Recessions bring about job loss and economic downturns that cause lower pay and less money. If you can pay off any high-interest debts you may have accumulated before a recession hits, you will have a better economic standing to help weather the storm.
Start with either the debt snowball or debt avalanche method to help get rid of the debt. Then you can put more of the money into investments or build a larger emergency fund.
Living Within Your Means
Budgeting matters as you live life. Some people like to live the YOLO life and life as if tomorrow is not going to exist. That is not the case if a recession happens. All those nights of spending the max on your budget will bite you.
You must learn how to budget your money and live below your means. If you truly want to prepare for a recession, learning how to live within your means is paramount to surviving.
Break down your expenses and add some saving categories for an emergency fund and your retirement fund. It is a foreign concept, but if you wait till the end of the month to save your money, there may not be much left over. Learn to live on less and start trying to pay yourself first before you pay off your bills.
Several different budgets have appeared that help people out.
- Dave Ramsey's Budget Percentages
- The 50/30/20 Budget
- The Zero-Base Budgeting
- The Envelop Budgeting Method
There are many ways to organize your spending to help you to minimize how much you spend on things. Learn how to budget.
Investing For the Long Term
“Invest in a diversified, all-weather portfolio that is aligned to your risk tolerance.”Emily C. Rassam from Archer Investment Management
Investing for the long term sets you up in case of a downturn in the market. Your portfolio should be filled with excellent long-term investments that can outlast market volatility. If most of your investments are in high-risk assets, you could lose your shirt in a market downturn.
Most personal finance people will suggest having financial literacy and a stable portfolio that could last the ups and downs. It is great to see your portfolio skyrocket when the raging bull market happens, but watching that same portfolio crash and burn is not the same feeling.
Long-term investing starts with value investing. Invest in valuable companies or make it simpler by index investing allowing you to have a piece of every company.
Do not just have all of your eggs in one basket, but be diversified. That means do not have all of your money into real estate, but instead have a more diversified allocation with stocks, cash, and real estate. Diversification helps with downturns in the economy.
Having a long-term investment strategy can allow you not to fear a little setback in your financial future. It will enable you to focus on other things in your financial life.
Find a Recession Proof Job
One key thing to remember is that if your skillset and job are needed, you will be fine if a recession hits. If your job is not necessarily necessary, realize that it could be eliminated. During the Great Financial crisis, many companies laid people off because they were not needed or could find a cheaper alternative.
Being in a recession-proof industry can allow your employment status to stay strong. During the Corovirus pandemic, healthcare workers were a significant need for many were being hospitalized. Still, as travel halted, many travel industry workers were negatively affected, such as the service industry, airline industry, and tourism.
Finding a recession-proof job such as healthcare, skilled labor like a plumber, or any other positions that would always be needed can help you with your employment as economic downturns occur.
Create Multiple Streams of Income
Creating multiple streams of income is like diversifying your investments. You not only make various ways to bring revenue into your pocket, but you are allowing yourself to create recession-proof avenues for income.
The average millionaire has around seven different sources of income. They do this in case one stream of income dries up. Multiple other streams are allowing them to continue to prosper.
“It may also be a good time to consider starting a side business to diversify your sources of income.”Michael Reynolds from Elevation Financial
When one income dries up, there will be other sources to take advantage of. If you are learning how to prepare for a recession, then take time to learn how to create new skills and other sources of income.
People lose jobs in recessions. Economics may decrease the spending power of our money. If you can go about and create avenues to lessen the blow of a lost job or the inflation of your money, you will be set when the recession ends.
Think about things you may be passionate about. Something you have a particular skill set that people will look at and make into a paid gig. If you are a fantastic builder, you can start building furniture. If you like dogs, you could be a dog sitter.
The possible opportunities out there create avenues for you, an individual, to take advantage of and make a side income with your skill set. Take note and create many different streams of income to help buffer yourself in case of a recession.
Improve Your Skills
Working daily can become monotonous. People may allow their skills to slip or only sharpen one or two of their abilities. If you want to know how to prepare for a recession, it is time to prepare your skills for other opportunities.
Learning new skills or even making the ones you have invaluable can be an asset. As businesses look to lay off people in a recession, having a great skill set that they cannot let go of is an asset.
Many businesses are all about talent acquisition. Take opportunities to show your employer how much value you bring to the table; if you have a chance, take a class, course, and any opportunity presented to you to improve your skills.
You never know what these new skills can do for your current job or the next future job. As recessions are to loom, people without the skills will not be able to get new employment or stay in their current careers.
Build Your Network
“If you're a business owner and concerned about a recession, it's a great time to put additional efforts into marketing, networking, and other business-building activities to help strengthen demand and build a pipeline of new business.”Michael Reynolds from Elevation Financial
Building your network is something not only businesses do but individuals do as well. It cannot be overstated how important creating networking opportunities are for your future career or business.
Michale Reynolds makes the excellent point that if you can create new opportunities through networking, you will have a pipeline for new business. As someone trying to build up your skills, you can also build up new opportunities for a new business or career.
Recessions should not be a time to panic suddenly, but as you work your career, you should always search for ways to create opportunities to advance your career or your business.
Living below your means is one thing that helps with your finances as a recession hits, but if you can live frugally, then you will have discipline already worked into your everyday life.
It is much harder to cut things when you spend much more money as you make more money. Living like the Joneses next door can be something that many of us start to do, but a disciplined spending style that continues to live a more frugal life will allow us not to bat an eye as a downturn happens.
“Stay disciplined with your spending: If your income hits during a recession, it's important to stay disciplined with your spending.”Kelan Kline from the Savvy Couple
Like Kelan Kline mentioned, we must stay disciplined with our spending. Frugality is the concept of being economical with your money. By creating a more frugal life, you will have the ability to continue to live life even though your income could be cut a bit more.
Live a life where you spend money on things you care about and cut money on other unnecessary items. If you like to travel, save for that and cut other things out like going out to eat. The discipline you create in your spending behaviors will help you when a downturn occurs.
Things You Shouldn't Do in a Recession
Talking about things you should do to prepare for a recession is excellent, but being mindful of what we should not do is another helpful tip. People with the mindset that the raging bull market will never end will quickly learn that recessions do happen and people do lose their shirts.
Here are a few things to avoid while in a recession.
Rack Up Unnecessary Debt
The thing to avoid is creating unnecessary debt. People going out and buying too many cars or too big of a house in a recession can result in financial collapse. If you are on the brink of barely keeping up with payments and lose your job one day, those enormous debts will continue to create even more debt.
It is best to be smart about your finances while in a recession. That means continuing to live a frugal life. Excess spending will create negative cash flow within your budget that you may not be able to handle if a recession occurs and your income is lost.
It is natural to see the market in flux and people losing money because the market is red like the Nile in the story of Moses. People fear that life may end with the market tumbling down. The mainstream media continues to blast some of the narratives, and therefore people act. One of the worst things people may do is stop investing. Usually, you cut investing because it is believed that the more money you put in the market, the more you will lose.
Many companies are offering their shares in large sales as their shares are down in price. The question we must ask is, do we want to pay higher prices or lower prices? Of course, many people would enjoy appreciation of their assets.
One thing to not do in a recession is to stop investing. If you have been frugal and have a stash of cash, you can use that to continue to invest, and when the market jumps back up, your investments will rise. Take advantage of the multiple amounts of sales. Future millionaires are made from those fearful of selling shares in downturns.
We see that recessions do not have to be something to freak out about. Using some of these valuable tips given by all sorts of financial experts can allow us to be prepared for any economic downturns that may occur. Start taking action now. Improve your finances through budgeting, investing for the long term, improving your skills, and living frugally. These steps will help ensure that you will have peace of mind during a 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.