Are you worried about how to prepare for a recession?
With talks of an economic recession looming, the best thing that you can do is to be prepared.
Now is a great time as ever to start protecting your finances against an economic downturn.
But how exactly does a recession impact your personal finances?
What is a Recession?
A recession is a period of time when economic activity declines.
In a nutshell, people stop buying things, employment drops, and manufacturing slows, among other things.
The last recession experienced in the US was deemed the Great Recession– lasting between 2007 and 2009.
The impact of such an economic environment is the reduction in the workforce, loss of jobs, and companies closing.
This means that your personal finances could be at risk if you were to lose your job and become unable to pay your bills.
Unfortunately, for many people, this means that they have to resort to getting into more debt because they were unprepared.
As we’ve entered into a new decade, the same patterns of the Great Recession have arisen, but on a global scale. This is a sure sign that you need to start preparing for a recession.
It should go without saying, but the impact of a recession is never good and it takes a while for the economy to bounce back.
The best thing that you can do is be prepared and ensure that your personal finances are recession-proof.
5 Things You Need to Do to Prepare for a Recession
1. Save for emergencies
If you’ve ever experienced a job loss, the first thing that you’re going to think about is how you’ll pay your bills. You don’t want to add to an already stressful situation by not being prepared.
Saving for emergencies enables you to have funds set aside for those unforeseen situations.
The benefit of having these funds available is that you won’t have to go into debt to cover your expenses.
The worst thing that you want to do in a recession is to get into more debt with no outlook or promise of an immediate upturn.
While funds are still flowing steadily, start putting money aside in a high yield savings account or money market account and don’t touch it.
As your money sits in these accounts, it will accrue interest and build upon itself. Hopefully, you’ll never need to touch it; however, it will bring peace of mind to know that it’s there.
If you’ve had trouble saving in the past, I recommend doing a savings challenge to hold yourself accountable for meeting your savings goal.
2. Pay off Debt
As if having debt isn’t already a burden when times are good, imagine when times aren’t so good.
The last thing that you want to worry about is paying 19% interest on a credit card balance or even student loans.
That’s why I recommend paying off as much debt as possible before an economic recession hits.
I got into depth on how you can pay off debt in my book Dump Debt & Build Bank: The Everyday Chick’s Guide to Money.
Why pay off debt? Paying off debt helps reduce your financial risk. It’s one less obligation that you’re responsible for if money becomes tight.
I recommend paying off your unsecured debt first. This includes:
- Credit cards
- Personal loans
- Medical bills
These typically come with higher interest rates, and therefore, may put you in a worse financial situation if left unpaid in the event of a job loss.
Student loans can be deferred in cases of economic hardship, so they’ll come later in the list of debts to pay off.
After saving for emergencies, pay off as much debt as you possibly can.
I recommend using Undebt.it to develop your own debt payoff plan. Note that a part of your plan may also include refinancing your debt for a lower interest rate.
3. Reduce spending
While saving up money and paying off debt, you’ll naturally have to reduce your spending to free up cash.
During a recession, the purchase of luxury goods and non-essential items slows down tremendously.
It should be no different in your budget.
Maybe now is not the time to purchase that designer bag that you’ve been eyeing. Instead, it’s time to be even more strategic and careful about your spending.
Reduce your spending to those things that are essential for your day-to-day living.
This would include ensuring that you have funds to cover you housing, food, and transportation costs.
If you haven’t done so already, you’ll want to get on a budget.
A but will allow you to plan out how much you will allocate for expenses so that you don’t overspend on things that aren’t necessities.
4. Increase your streams of income
Bringing in more money is never a bad idea. It’s especially important when corporate downsizing and layoffs are happening.
You never want to put all of your income sources in one basket. That means you want to diversify the way that you’re able to make money.
There are tons of ways that you can make extra money from home.
Try picking up a side hustle or starting a low-cost side business.
There will always be services that people will pay for, even in an economic downturn. Figure out what those are and create a business around it.
5. Don’t panic
Lastly, don’t panic! I get that the thought of an economic crisis is scary, but remember economies always bounce back.
Take heed to the steps mentioned in this post and financially prepare yourself for what might come.
Remember, everything is just speculation until it happens. But, I’d rather be safe than sorry. Wouldn’t you?