How do you get ready for a recession? Is that even possible? With gritted teeth and a hopeful vision, yes, we can. Here’s our take on how to prepare for a recession.
The world has been through vicious economic cycles numerous times. Skyrocketing inflation, rising interest rates, job losses, industry downturns – this, too, will pass. That means no need to stress it out, go panic buying, or cause a bank run.
On the macro level, the government and the business sector can institute policies and safety nets to make a recession less challenging to us all. On a personal level, there are measures that you can adopt or practices you can avoid to survive a recession.
How To Prepare for a Recession
Recessions are no stranger to the global economy but can drastically affect people’s lives. They are defined as a significant decline in economic activity, typically resulting in higher unemployment rates, lower consumer spending, and a general feeling of uncertainty.
During a recession, it’s common to experience increased job losses as companies tighten their belts, leading to rising unemployment rates and financial strain for many households.
Stock markets will often take a big hit, too. Businesses may start cutting back on production while consumers become more reserved about spending habits out of fear and caution.
So, let’s unfold expert advice on preparing for a recession, identifying financial priorities, preparing a budgeting and spending plan, doing a debt strategy, and increasing your savings.
1. Identify Your Financial Priorities
When a recession comes, you may suddenly find yourself without enough money or savings to face it head-on. The key to survival is by identifying your financial priorities. Determine what expenses and payments you need to make and prioritize them.
One helpful strategy to navigate your finances during a recession is to follow the 50/30/20 rule. It is a budgeting guideline that can assist you in managing your money effectively, even during challenging economic times. According to the 50/30/20 rule, you should allocate 50% of your income toward essential expenses, 30% towards discretionary spending, and 20% towards savings and debt repayment.
2. Preparing a Budget or Spending Plan
Make a budget or spending plan after you’ve identified your financial priorities. The first step in creating a budget plan is determining your essential and non-essential expenses. Once that’s done, it’s time to allocate your funds in a way that can cater to each of your needs with an emphasis on the essential items.
Regularly monitoring and adjusting your budget or spending plan is essential to stay on track during a recession.
Platforms such as You Need A Budget (YNAB) can assist you in organizing your finances effectively, thanks to their utilization of zero-based budgeting.
3. Formulating a Debt Strategy
Recession forces many people to re-evaluate their approach to debt. If you already have mounting debt, it is time to consolidate it. Debt consolidation makes managing your finances more manageable and allows for lower interest rates, repayment periods, and, what’s more, only one payment to make.
Formulating a debt strategy is crucial, especially during a recession, and paying off debt should be a significant focus. Start by assessing your outstanding debts and creating a repayment plan prioritizing high-interest or those with the smallest balances. Implement strategies such as allocating extra funds towards debt payments or considering debt consolidation options to accelerate repayment and achieve financial stability sooner.
4. Increasing Savings
Many financial experts suggest setting aside at least three to six months of living expenses or establishing an emergency fund to provide a buffer if something unexpected happens.
The best way to do this is by making minor lifestyle changes and saving money where possible. For example, try putting a portion of your salary into a savings account and setting a goal of what amount you want to reach.
5. Investing Smartly and Cautiously
When making investment decisions during a recession, it is important to prioritize long-term investments over impulsive choices. Consider your investment goals, budget, and risk tolerance before proceeding. There are several resources available that can assist you in making informed and wise investment choices aligned with your financial objectives.
- Empower – is a free online platform that helps you track your investments and recommends paying the lowest fees possible. Read our full Empower review for more information about the platform.
- M1 Finance – is a stock and ETF brokerage that helps you invest in stocks for as low as $100 with no trading or brokerage fees. Check out our M1 Finance review, learn more about the platform’s services, and start investing now!
- Acorns will round up to the nearest dollar and invest that money in every purchase you make. Check the complete Acorns review. Sign up now, and get a free $20 bonus.
6. Reconsidering your Mortgage or Living Arrangements
During a recession, it’s imperative to consider your financial expenses, especially if you’re a homeowner. It’s recommended to consider refinancing your mortgage for a lower rate, renegotiating your insurance rate, or even renting out a room in your home for additional income.
However, if you’re renting, it’s vital to revisit your lease agreement or renegotiate your rental rate to prevent unwanted expenses. Alternatively, look for a roommate to lower your living expenses significantly.
7. Upskilling for Increased Job Market Competitiveness
Upskilling refers to improving or learning new skills to become more marketable. It can give you an edge in a competitive job market and show potential employers you’re invested in your career development.
Plus, upskilling can help you stay relevant in an ever-changing job market. Whether taking a class, learning high-income skills, or earning a certification, upskilling is a proactive way to prepare for the unknown and increase marketability.
While the job market is bound to shift, specific jobs will stay in high demand during a recession. Let’s take a look at a few popular recession-proof jobs:
- Healthcare workers
- Software developers
- Architects and engineers
- Utility workers
8. Diversifying Investments
When investing, make sure you’re investing your money in a balanced, diversified portfolio that includes stocks, bonds, and other securities. Then, if the stock market takes a hit, your funds will be diversified enough to weather the storm.
If you’re looking for investments that are low-cost and easy to maintain, see if any of these funds fit your preferences:
- FNILX Vs. FZROX – comparison of two different Fidelity funds that charge zero fees.
- FXAIX Vs. SPY – where we compare two S&P 500 funds that contain the 500 biggest companies in the U.S.
- FZROX Vs. FSKAX – where we compare two funds that cover the entire stock market.
What Not To Do During a Recession
If you’re wondering how to stay afloat during a recession, the good news is that there are simple steps you can take to protect yourself from a potential financial disaster.
- Don’t Get Into New Debt
Racking up debt can be like walking on thin ice during a recession. Not only is it tempting to take out loans or use credit cards when times are tough, but interest rates also skyrocket—making repaying those debts way more expensive in some situations.
What is the best thing to do? Draw up a budget and stick with the essentials. Only get into new debt when there’s absolutely no other option.
- Don’t Make Risky Investments
Jumping into risky investments for quick financial gains can be tempting in a recession.
Instead of taking on potentially damaging risks, focus your energy on protecting what you already have and building your wealth steadily. You’ll still appreciate those profits when they start rolling again.
- Don’t Sacrifice Your Health
When times are hard, it’s understandable to want to save money on healthcare – but this could be dangerous. Postponing preventative checkups or necessary treatments can cause severe issues in the future.
To ensure you attend regular doctor visits and get affordable treatment options, look into programs like COBRA and Medicaid. Taking a few extra steps now can save your health down the line.
- Don’t Withdraw From Your Retirement Accounts
During a recession, it may seem like taking money out of your retirement accounts is an easy solution to financial difficulties. However, this could come with penalties and fees that outweigh the short-term gain.
So instead of raiding your 401(k) or IRA accounts, look for other sources of income – like creative side hustles – which can help make ends meet during tough times without costing you any extra in taxes.
- Don’t Panic
In turbulent times like recessions, staying calm and collected can be a challenge – but it’s the best way to keep your finances in check. Instead of worrying about what might happen next or making hasty decisions, take solace because economic downturns are simply part of life. Stay level-headed, and you’ll soon see clearer skies ahead.
Frequently Asked Questions (FAQs) – How To Prepare for a Recession
What Is Most Needed During a Recession?
A range of policies might be necessary—from increasing the money supply and bailing out financial sectors to providing unemployment benefits, helping small businesses stay afloat, creating stronger social nets for those in need, and boosting consumer confidence.
Plus, global coordination is critical! All these, put together, can help stabilize economies and keep us safe during hard times.
What Is the Best Way To Survive a Recession?
A great way to start is by creating and maintaining a budget, which will help you keep your spending within limits. You can also boost your bank balance with extra remote or freelance work income—two birds, one stone.
What Should You Not Do in a Recession?
If they don’t work out, avoid taking on extra debt and making risky investments that could put you even further behind. Also, make sure not to sacrifice your well-being; no amount of money is worth compromising the health and safety of yourself or your loved ones.
Lastly, try not to give into fear-based thinking, which can cause more harm than good when crunching numbers during a recession.
Conclusion – How To Prepare for a Recession
Your financial security and peace of mind depend on how you prepare for a recession. When it comes, the effects of a recession will not go away: prices will rise, companies may downsize, the stock market may take a dive, etc.
Discomfort and anxiety are understandable reactions to this, but we can harness these negative states into positive energy by focusing on taking care of our own finances.
With the ideas presented in this article, we can protect our finances and continue preparing for our financial empowerment, recession or no recession. You got this!