BudgetingPersonal Finance

How To Prepare For A Recession- 5 Things To Keep In Mind

For most people, the Great Depression was more a story than a fact they had lived through. However, all of that changed with the emergence of the coronavirus pandemic and the economic downturn that came with it. During that period, the average person became a financial analyst. Words and phrases like ‘recession,’ the ‘stock market’ and ‘significant decline’ became the staple of most people’s vocabulary. Those who were worst hit questioned why the authorities did not foresee or put plans in place to prevent or arrest such developments. Whatever the answer is, there is no disputing that the world needs to take collective efforts to ensure that the Great Recession does not become the reality again in the coming years.

Before going further, it is important to answer the question: ‘what is a recession?’. Generally, a country is said to be in a recession if it experiences significant economic decline for more than two consecutive quarters. It is typical for the country’s Gross Domestic Product (GDP) to experience negative economic growth in such situations. A recession might be declared a lot sooner, though. For instance, in 2020, in the wake of the coronavirus pandemic, the National Bureau of Economic Research, which is the body that declares recessions, declared a recession before the two quarters were up.  A recession is evidenced by huge government debt, high-interest debt, and citizens’ reliance on handouts and stimulus checks from the government.

Though you may not tell when another recession can hit, it is important to prepare for it. Learning how to prepare for a recession includes things like putting your finances in order and some other top proactive measures that can help make sure you keep flourishing despite the recession.

Ready to learn exactly how to prepare for a recession? Let’s get started1

Recession causes depression

How To Prepare for a Recession

When a recession hits, the sector that gets hit hardest is the stock market. Stocks come crashing, and anyone investing during that period loses their money. However, beyond that, economic activity can also come to a standstill, with living conditions and expenses soaring through the roof. As stated in the introduction, it is indeed possible not only to learn how to prepare for a recession but also to thrive in such situations.

Below are some of the steps you can take to become better prepared should a recession hit.

Reduce Expenses

The first thing to do while preparing for a recession is to reduce living expenses. It is important to note that regardless of how your expenses are currently — that is, whether you are frugal or a liberal spender — you can cut down on your spending. Reducing your expenses makes sure that you have more money available to you if the recession actually hits. Thus, you will not need to take advantage of employment benefits just to make sure you do not drown.

Cutting down on your expenses is not easy. It will, of course, require you to make smarter financial decisions. One of such is monitoring your spending patterns. Thus, you should consider what items you spend more of your finances on. Furthermore, you could also verify if you pay with your debit card or with cash — this is to note what channels your money leaves from.

After this, you need to create a budget and stick to it. Of course, the ideal budget should only contain the necessities. Remember, if the goal is to cut down on your expenses, then some of the things you like will have to go. Furthermore, You need to eliminate money-gulping items such as maintenance fees for entertainment sites such as Netflix.

Prepare for a Recession

Invest into Your Emergency Fund

First of all, this assumes that you have an emergency fund. If you do not, then you are doing something wrong. Creating an emergency fund is the first step in preparing for a recession. Beyond that, though, you need to make regular contributions to the fund. Ideally, at every point, the fund should have enough money to carry you through three to six months at a stretch. If you are conscientious, you could even save up enough money to last you two straight years without having to borrow from anyone.

You should use your regular everyday expenses as the yardstick for setting up your emergency savings. Thus, within the three to six months we contemplate here, you should be able to keep up with paying for regular groceries, consumer goods, etc.

Pay Off Your Debts

On the surface, it would appear like the less money you spend while preparing for a recession, the better for you. Thus, you may think that it makes sense to stave off paying your debts to a future date, perhaps after the recession has passed. However, that is bad advice. It is important to pay off your debts while preparing for a recession. This is because it saves you the pains of having to offset the debts and the interests accruing from him during the recession. Additionally, the interest rates on the debts could climb, leading to extra payments eventually.

As a rule of thumb, you should start with paying off high-interest debts. Thus, you may want to start with student loans or any credit card debt with high-interest rates. If you have minimum payments you should make periodically, say monthly, try to keep up with that. The less debt you have when the recession eventually begins, the better for you. If paying off debt and managing your finances is a struggle though, there are tools and apps that can help such as YNAB, Acorns, and Dollarbird.

How To Prepare for a Recession-Pay Off Your Debts

Take Cognizance of Your Investment Accounts

You should be looking into viable investment options when preparing for a recession. The investment objectives will be to have a means of sustenance when the economy starts to slide downwards. Industry professionals will tell you that investments give you the surest pathway to sustaining viability during a recession. You can sell investments for money, even if you aren’t interested in just keeping up with the interest accruing from your savings. There are so certain stocks you can buy during a market crash that can potentially provide profit. Having investments is also one way to get a free credit score that will put you well ahead if you need loans sometime in the future.

Of course, having investments does not automatically translate to more money. Investments are tricky. You may even lose money while you are at it. Thus, you need to consider your risk tolerance, and whether the possibility of a loss is something you can deal with.

Protect Your Job

One unfortunate fact about a recession is that unemployment rises. When people suffer a job loss, it invariably means that they get into more debt. This comes with accompanying challenges such as an inability to cater to basic needs, anxiety, and worry. Thus, you should do your best to protect your current job while preparing for a recession. The period you prepare for a recession is not the best time to go job hunting. Except if the job is so unbearable and you are losing money on account of it, then it would make sense to jettison it for another.

The whole point of looking to protect your job during the pandemic is to ensure you have a steady source of income during the recession. Thus, you may want to diversify your income by beginning another business during this period. Starting a new business or service is not as hard as many people make it seem. You need only identify a need that ties in with a skill that you possess. Then look for the best medium to deploy these skills to make money. There is no shortage of pathways to explore: from writing to freelancing to selling goods and services. The important thing is that you are making money and you aren’t part of the statistics that will make up the unemployment rate if the recession hits.

Mistakes to Avoid During a Recession

Although recessions are not new, their manifestations vary from one to the other. In general, below are some of the mistakes people make while preparing for a recession. 

Panicking

Whether preparing for a recession or not, at no point is panicking a great idea. When market downturns occur, you could be tempted to get flustered. Do not. Apart from anxiety being unhealthy for you, it could also drive you to make decisions that are incompatible with your financial goals. Thus, when the value of stocks plummet you should stay strong. Always bear in mind that economic recovery is a possibility. You may want to take your eyes off of your finances. Also, if you have any debt, you may want to focus on ways to pay off the debts, instead of panicking or being clustered about it.

Avoid Mistakes During Economic Downturn

Hoarding Investments

While it is good financial advice not to spend so much cash if you are preparing for a recession, the same does not apply to investments. It is a bad idea not to keep up with investing even while preparing for a recession. This is because in some cases, it is the money from the investments that will keep you afloat during turbulent financial times. You must understand that your investment decision need not be elaborate. It could be as simple as investing in your regular high yield savings account. Account-holders of high yield savings accounts get some interest after a stated period. Being disciplined and committed to it could be all you need to do. Investing during the run-up to a recession can be dicey, so always consider how much risk you can comfortably manage. What works for one person may not work for you. 

Going into Debt

If paying off your debts is one way to prepare for a recession, then going into debt produces the opposite result. You do not want to have a debt hanging over your head while you are looking for ways to survive a recession. This is because when you go into debt just before a recession, the interest rates you’d have to pay to offset the debt will be exorbitant. More so, it affects your credit and will reflect badly on your credit report. The latter is terrible because you need your credit report to be stellar at every possible point. Thus, do your best to avoid anything that will cause you to get into debt. If you cannot afford anything, forgo it, instead of planning to pay for it in the future. 

Beginning Big Projects

Anything you want to start during the pre-recession period that isn’t intended to bring in money is a bad idea. It doesn’t matter how much you love the project, you should prioritize protecting your finances above all else. So, do not begin new projects while preparing to survive a recession.

Conclusion: Preparing for a Recession

However hard you wish to change something, you most likely will be unable to prevent the next recession from happening. The factors that cause it are well outside of your reach. This is why the most logical thing to do is prepare for a recession and not to run or cower from it. Remember, tough times don’t last, tough people do. Keep being intentional about your economic activity spread even as the signs of a recession show up. The Great Depression (if and when it happens), will not find you unprepared.

Kevin

Kevin is an ambitious entrepreneur that is obsessed with all things related to finance. From a young age, Kevin has always been involved with side hustles ranging from online selling to freelance work. Over the years, Kevin graduated from side hustles and started launching multiple online and offline businesses. Kevin is a serial entrepreneur who loves starting new businesses and exploring all things related to business and finance. He is constantly looking for new ways to save money, invest money, and create income streams.