The recent strains in the economy point to a potential recession. We are struggling to control inflation and things seem out of control. A recession is difficult to predict, and definitions vary widely as well. However, several global leaders have issued warnings of signs of a pending global recession. The signs are already there – people losing work, companies making fewer sales, and the country’s overall economic outlook declining. A country is said to be in a recession when it’s Gross Domestic Product (GDP) falls for two consecutive successive quarters. This signals a contraction in the business cycle where there is a general decline in business activity within the country.
How You Can Prepare For a Recession
Here are five ways you can prepare yourself financially for a potential recession:
1. Take Stock
The most difficult part of a recession is not knowing what comes next, and when things will get better. Thus, knowing you’re personal risk factors will be key moving forwards. Be clear about your current financial situation. Ask yourself these key questions as you take stock of your current financial standing:
- How much cash do I have on hand?
- How much cash can I get quickly, if I need it?
- How much debt do I currently have?
- What are my basic living expenses?
- Do I feel secure in my current employment? and/or Are my income streams secure? Is my ability to cover my living expenses at risk?
- Do I have any major life events coming up that will need significant cash? eg. wedding, baby etc.
Answering these questions will give you an idea of what you need to improve or change. Thus, ultimately, give insight into what you need put in place in order to weather the storm of a recession once it hits.
2. Stay Invested, Reduce Your Portfolio Risk
Market volatility and hard times may have got you seriously considering getting out of the market. However, it is important to keep your emotions in check and remember your long-term objectives. Instead, shift your view a little bit and look at this as an opportunity. Focus on companies that have strong balance sheets, strong cashflows and products that consumers are using and need.
History shows that bull markets last longer than bear markets. Therefore a market downturns can be seen as just hiccups in an upward trend in the long-term perspective.
Additionally, when stock markets are down, you can consider balancing our holdings with bonds. Bonds tend to hold up better than the stock market. Bonds also serve as an essential ingredient in your portfolio. They offer stability particularly for people who are in or getting close to retirement.
Learn More: How to Invest in Uncertain Times
3. Save More, Build A Larger Emergency Fund
Save as much as you can whenever you have some extra cash. A recession can quickly change your circumstances – No telling! Ensure you have a good sizeable emergency fund. The standard three to six months’ worth of living expenses will not be enough. Consider increasing your reserve by saving a lot more and putting off big spending items.
Additionally, it would be wise to set up a backup emergency fund as a place of last resort when you need money in a pinch. If you are a young investor, it is easier for you to downgrade your lifestyle. For instance, you can get a roommate or switch careers to take advantage of any new job opportunities. However, if you are older, it won’t be that easy. It is more difficult to change your housing situation for instance. Or, change your high-paying specialized job or even replace your income entirely if you lose your job. That is why, setting up a backup emergency fund is crucial. Having at least a year’s worth of savings or assets you can easily liquidity on a rainy day.
The idea here is not to resort to debt, if you lose your income or because your income isn’t keeping up with the high inflation rates.
Learn More: How Does Inflation Affect Your Investments and Savings?
4. Avoid Debt, Consolidate or Pay It Down
If you have any debt, consider paying off high-interest rate debts first, otherwise, avoid debt. When a recession is probable, it is wise to avoid debt as much as you can. During a recession, interest rates rapidly rise.
However, if you are torn between paying off your debt and saving more in the face of economic uncertainty. It is wise to consider your entire financial situation first before applying extra cash to existing debt. On a normal day, we would be trying to save more. We would be prioritizing paying off high-interest debt with extra cash to reduce the total interest we pay in the long run. However, in the face of an economic downturn, things are different. A lot of things won’t make sense – prioritize yourself!
Consider your ability to cover your expenses. Your overall financial stability and other strategies, if there are any at your disposal to reduce your debt. For instance, you consider loan consolidation. Before trouble actually hits, you can put multiple debt accounts into one loan by taking out a new loan to pay off the debts. By doing so, you create more opportunities to take on more debt in the future.
5. Earn More And/Or Cut Expenses
Since the pandemic, many of us have significantly cut down on our expenses to the point it’s hard to cut back anymore. With inflation consistently on the rise, it feels like a futile endeavour. However, it goes without saying – paring down unnecessary spending before a recession is critical. And the first benefit to this is to save the additional money you need to increase your reserve funds.
If you’ve reached your limit – you are down to the bare bones of your budget, consider earning more. Get a side gig, revamp your resume or think about the ways you can build or restructure your business to earn more. Diversifying your revenue streams is the best way to stay ahead of the curve.
Times of a recession may be uncertain, but the best thing you can do is stay proactive. Take proactive steps to prepare, in order to stay on top of your finances in these stressful times. Now more than ever, financial education is important. It is important to know your current financial situation and how you can improve your financial standing. So that, through it all, you can feel good about where you are with your money, regardless of any challenges that lay ahead.
Ultimately
It is all about financial security. If you can reach a secure spot without having to risk everything, you will be able to withstand it.
Even though you adequately prepare for a recession, it can still be a frightening experience. Remember the COVID-19 recession of 2020. We all thought we would never get out of it but here we are in 2022. The good thing is that recessions do not last forever. They eventually come to an end. And when they do, they are followed by arguably the strongest periods of economic growth.
Let’s continue to work hard and pull up our economy!
Image Credits: Top by Riya Kumari via Pexels.