So, I’m not saying there is going to be one right now. But every 3 -4 years many people seem to forget there is a recession every 3-4 years. With this in mind, it might be an idea to understand how to prepare for a downturn. Because one is always going to come sometime in the future. So here are some ideas for how to prepare for a recession.
If your reading this in 2020 then a reasonable guess would be that there might be a recession on the way. Yes, ok it might be that the horse has already bolted and you should have already taken action. But we are where we are and have to make the changes we can right now.
Table of Contents
What is a recession?
A recession is when there is a general decline in economic activity, or everybody stops spending money. Sometimes it’s classified as two-quarters of negative growth. So, until the financial data has come in, in theory, it’s not a recession. However, the media will be banging on about it before during and after it happens.
In general, a recession usually only affects one or a few countries at a time. Granted if your neighbouring country goes into recession, it might spill over into yours and others but won’t likely affect different continents. unless you are china or America when a recession here will affect most of the world.
The caveat here might be the US or China, which are such big economies if they have financial problems, we might all feel it.
Recession vs depression
An economic depression is a recession on steroids. It’s when there are massive job losses, a severe regional or global downturn in spending and economic activity. A depression is usually also more long-term than a recession, two or more years and sees a 10% or higher drop in GDP (Gross Domestic Product – everything the country makes and sells)
The coronavirus may result in a global depression as more or less every country shuts down their economy for a month or more (or it may not).
Most references to a depression reference the Great Depression in the US starting in 1929 and finishing in 1933. It began with a massive stock market sell-off, the large-scale closures of businesses and massive levels of unemployment.
Hmm sounds a bit like 2020, no?
How to prepare for a recession the practical steps
All these steps or actions you can start now, ideally you did them yesterday but today is the next best time, tomorrow is the worst.
1. Have an emergency fund
Standard thoughts on this have been 3-6 months expenditure available in cash in an easy access account. This amount is connected to how long it might take you to find another job, i.e. 3- 6 months but also includes the types of costs that might come up in day to day life. Your boiler needs replacing, the car breaks down, you need to make an unexpected trip for good for bad news and need to pay for it.
If you don’t have an emergency fund in place, every unexpected expense or money challenge becomes a crisis. The boiler breaks, and you can’t find the money to fix it so you take our credit which you can’t pay off and start incurring expensive fees and on and on it goes.
Set up a separate account, name it the Emergency fund and automate money being transferred into it every month. Start small, start now.
2. Live Within Your Means.
Obviously spending less than you earn or earning more than you spend will put you in a much safer place. This will already give you some breathing space in your finances to flex when things go wrong.
If you spend all your income, you have no safety net for any changes. If you spend more than you earn, you have a one-way ticket to bankruptcy / financial anxiety. You will need to work for money forever. You will be digging a bigger and bigger whole that you will need to try and get out of at some point.
3. Keep a budget and track your expenditure
Keeping a budget will help you live within your means. If you set how and where you want to spend your money, you can make sure you live within your means.
If you know where your money is going, you can review if you are happy with this. You can also review can you get what you want or need cheaper elsewhere? Can you cut down on how much you spend and ultimately can you cut it out?
By reviewing how and where you spend your money you can evaluate are you happy with it? Are you getting what you wanted form the things you bought and from the money you spent all that time working for?
4. Start a side hustle
Having more than one source of income is going to give you greater security and diversify your sources of money.
Do you have a skill or hobby that other people will pay to hear about or be taught in? Crafts, languages, DIY or skills related to your job?
Do you have a story to tell, fictional or factual that you could write up into a Kindle book and self-publish?
Could you start a blog in your niche hobby or interest that would attract an audience?
Any of the above could earn you modest pocket money or a serious side income and every little helps.
5. Pay down or pay off debt
You could choose to pay off or pay down some of your more expensive debt and or in an ideal world not get into any more debt. Debt is a drag on all your finances, well being and wealth building.
Even if all businesses close and you are made redundant – the debt collectors will still come calling so better have a plan to pay them off as soon as possible or before they come by.
You could set up additional payments to pay it down faster – the debt avalanche method.
You could try and pay off the smallest debts as quick as possible to see progress asap – the debt snowball method.
6. Remember what you are investing for – the long term
Stock market crashes or as I should say temporary market declines happen way ahead of the actual arrival of a recession.
The best thing to do when stock markets decline is probably nothing. As this is part of the normal market cycle. If you do nothing, you have not lost any actual money. With time the market will recover as it has always done. Never be a forced seller, as this will be when you have to sell even when it’s the worst time to do so.
However, if you panic sell, you will crystalize any losses turning them into real losses. This is also probably telling you that you shouldn’t have been investing in the first place and or that your tolerance for risk was much lower than you thought, i.e. you can’t take the ups and downs.
At times of market volitivity, you need to remember what you were investing for and how today’s market ups or down fits in with that. Were you investing for short terms games so speculating or where you investing for long term growth?
Over the long term, the stock market always goes up, so today’s losses make little to no difference to a 10+ year horizon. This is often more a mindset issue.
Do you believe that over the long-term things will get better or because they are lousy today they will always be bad? In the heat of a crisis, it can feel like the sky is about to fall. But as time passes, you realize things weren’t that bad and seem to be looking on the up every day.
If your investments are well diversified i.e. not all your eggs in one basket, then some will be up, some flat and some down. Stay diversified and rebalance your investments to reflect your risk tolerance and your stage in life, i.e. how far away are you from reaching your goals?
7. Networking your social and professional contacts
The bigger your social and professional network the better you will be able to ride out any downturn in the economy. People will help you find work and or support you as you have to make changes to your lifestyle.
A strong professional network will recommend you for interviews, jobs or assignments, they will send you adverts and generally be your advocate.
Linkedin is one of the leading professional networking sites where you can add your profile, message people, post articles and advertise for jobs or your skillset.
If you have a strong social network through friends and family, church or social clubs they may come to your aid. Helping you through painful periods and of course you can do the same for your friends and colleagues.
8. No news is good news – sometimes
The news is often just a collection of bad and ugly stories put together to keep you horrified and hooked on watching, reading and listening for more bad news.
Once you can move from watching the news hourly to one good quality update a day, you will hopefully find your stress levels reduced significantly. After about 15 minutes the news tends to start repeating itself anyway.
9. Don’t Panic
Few good decisions are made from a place of panic especially ones with significant lasting outcomes. Once you start panicking all bets are off. You are now at risk of making a series of bad decisions.
Buying or selling big positions in any investments outside of your normal investing process i.e. selling all your shares because you believe it’s the end of the world. If it is the end of the world, then its already too late and money is probably now worthless. So it’s probably best to treat your investments like your face and don’t touch it.
When things get bad, revaluate what’s important to you and especially where your money is going. Are you getting what you need and want from your current expenditure?
If your income is about to reduce a review of where and how to cut or lower, your outgoing might be needed ahead of time.
Your mindset around these times and the behaviour this leads to will be a crucial driver of how you can react, adjust and hopefully come out of a downturn in reasonably good shape.
Do you believe in the ingenuity of humans to solve and overcome new challenges, or is it all lost?
10. Increase your financial IQ
This is a great time to increase your financial knowledge. You can read books, listen to podcasts or watch YouTube videos. All to help expand how to make, keep and grow your wealth and of course what not to do with your money.
So, go on have a go
Read some books
Meaningful money By Pete Matthews Everything you need to know and everything you need to do.
Your Money or Your Life, 9 Steps to Transforming Your Relationship with Money and Achieving Financial Independence
RESET: How to Restart Your Life and Get F.U. Money: The Unconventional Early Retirement Plan for Midlife Careerists Who Want to Be Happy
Listen to podcasts
https://meaningfulmoney.tv/mmpodcast/ an excellent UK personal finance focussed podcast
https://www.choosefi.com/all-articles-and-podcasts/ A really good financial independence focused podcast.
https://joinupdots.com/ a Superb small business start-up podcast all about setting up your own business.
Any way those are my thoughts on how to prepare for a recession let me know yours in the comments below.
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