How to Prepare for a Recession: 5 Things You Need to Know
Although economic downturns are a normal part of the economic cycle, you should still be prepared for them when they occur. Here are 5 tips to set you on the path.
It’s the infamous R-word again.
Last month, the U.S. went into a technical recession (at least according to the dictionary), when it was confirmed that its economy had shrunk for two consecutive quarters.
Europe, too, seems to be bracing for an economic downturn that may do little to tame high inflation that has already made many consumers brace for the worst.
Naturally, all this talk about inflation and a looming recession may have you worried about your finances.
But there are a few things you can do right now to be ready for whatever is ahead.
#1: Keep a budget and reduce your expenses
First, it's important to know how much money you spend every month.
One way to do this is by writing down your expenditures or using a budgeting app that will help you track your daily, weekly, or monthly expenses to see where you need to trim unnecessary spending.
There are several expense categories you can easily cut back on, including club memberships, entertainment bills, eating out, and Netflix.🙂
Even though it may take a little work, in the beginning, your financial stress will start to decrease once you’re able to put aside some money.
If you’re not sure where to start, take a look at our beginner's guide to saving money from scratch.
#2: Build your emergency fund
Now that you have some money saved up, you can start building your emergency fund.
When the economy sinks, our jobs and our income can be at risk, which is why building an emergency fund is crucial when preparing for a recession.
No matter what your situation is, whether you have been laid off, lost your job, aren't making any money in your business, or made some poor financial decisions, emergency savings will provide you with a safety net to ride out the storm.
Financial advisors usually recommend that you have 3 to 6 months worth of expenses put aside in your emergency savings account, so you don’t have to borrow money when the economy is down and money is tight.
Borrowing money and using credit as a safety net may not be the best idea during a recession because you will need a higher income to repay the money (plus interest).
If you already have a debt, you may want to start paying it down as soon as possible.
#3: Pay down your debts
Having a debt burden is exactly what it sounds like: a burden.
During a recession, high debt payments will most likely complicate an already stressful situation.
And don’t forget that central banks have started hiking interest rates to tame runaway inflation. This will likely lead to your bank tightening the financial conditions of your debt, which will eventually make your debt costs more expensive… right at the time when it hurts the most.
Again, the first step to successfully paying off your debt is building a budget that accurately reflects your household's income and expenditures.
As already mentioned above, it will help you identify spending areas where you can cut back on, so more of your money can go toward paying down your debt.
The second step toward getting rid of your debt is creating new income streams.
#4: Diversify your income
As the famous saying goes, “don’t put all your eggs in one basket.” 🐤
It can easily be applied to your sources of income.
When you rely heavily on one job, you run the risk of losing your sole source of income and being unable to meet all your financial obligations if the economy tanks.
That’s why getting new income streams can be a game changer: if one income source fades - or disappears completely - you have other sources to cover your expenses.
You don’t necessarily need to get a second job to diversify your income. For example, if you’re a homeowner, you can rent out a spare room in your house or space in your garage, or perhaps even buy a revenue property and rent it out, if your finances allow.
And it goes without saying that diversifying your investment portfolio is as equally important as diversifying your income, especially during a recession.
#5: Diversify your investments
The economic downturn could be a financial disaster if all your money is invested in one type of asset. And it is for this reason that diversifying your investments is so important.
In other words, if you spread your investments across different industries and different types of assets, your investment losses will be less severe if the market tumbles.
During a recession, people usually tend to move from more risky assets to safer ones, such as gold and precious metals.
There’s a general agreement that, during a recession, riskier assets like stocks and high-yield bonds tend to decrease, while gold and U.S. Treasuries usually go up.
That’s why so many investors choose to buy gold regularly, which allows them to grow their gold savings and protect their wealth in the long term.
Read our SPOTLIGHT to learn more about gold’s historic behavior during recessions.
What’s the bottom line?
A recession is something we cannot control, but we can control how we prepare for difficult financial times. That’s why taking preventative measures now to protect your finances in the future can certainly make all the difference in the world.
To successfully manage your personal finance during a recession, you can quite easily do the following:
- Track your spending and cut out unnecessary living expenses;
- Start paying off your debt as soon as possible;
- Diversify your sources of revenue as well as investments;
- Start building your gold and precious metals savings.
At the end of the day, when you and your finances are well-protected, an economic downturn is no longer as scary as it seems.🤓