Hearing the word “recession” often causes anxiety and is, of course. A recession can lead to unemployment, lower stock markets, rising prices and severe financial stress. But the truth is, you can’t prevent a financial recession, but you can prepare for it and even thrive in the meantime. In this guide you will learn 10 important ways to put your finances into a recession and come out stronger on the other side.
Preparing for a recession is essential to your financial security. Knowing how to prepare for a recession will give you a powerful advantage. It can protect your finances, minimize risk and maintain control during economic uncertainty. Whether you’re worried about work, investment, or saving, taking smart and aggressive steps can help you get through what the economy throws your way. That said, let me explain what that means and how you can prepare for a recession.
What is a recession and how does it affect your finances?
A recession is a period of negative economic growth that usually lasts for at least two quarters. This is characterized by a slower overall economic activity. These include lower consumer spending, unemployment, lower income levels, and lower business production. You may also see a decline in real estate value and a decline in investment value.
The National Bureau of Economic Research (NBER), which officially tracks the US recession, defines it as “a significant decline in economic activity that spreads across the economy and lasts for more than a few months.”
Simply put? It’s a tough economic season that affects almost everyone, and being prepared for it can make all the difference.
That said, the economy works in a cycle. That is, they experience periods of expansion and growth, and periods of decline known as recession. For example, the Great Recession in 2008 was caused primarily as a result of the U.S. housing bubble. Or the global recession that was caused by the 2020 pandemic. A more serious case is known as depression, such as the Great Fear Pression of the 1930s.
What will change during the recession?
A recession can damage stocks and assets and lose value.
A recession could also cause a decline in interest rates. The Federal Reserve may decide to cut fees to get loans and make them cheaper to borrow money in order to try and stimulate the economy.
Additionally, this means that savings account fees will also be lowered.
Government debt could rise as stimulus package bills are passed to help those in need. And to help the economy recover and recover.
But this doesn’t mean that you shouldn’t invest in during a recession.
In fact, if you think that this is a good time to invest, then it may be if you get it right and tackle the stock market fears you may have.
How to prepare for a financial recession: 10 key steps
A recession will happen, but you can prepare for them. Below are 10 key tips on how to prepare for a recession.
1. Evaluate your finances before the recession reaches you
Before you start planning for a recession, think about what your finances look like now.
For example, what are you currently paying on your monthly expenses list? There may be costs involved, such as mortgages and childcare.
But is there anything you really don’t need, or can you afford to cut it?
For example, dry cleaning, hair and nail salon reservations, restaurants, etc. Perhaps you spend too much on the essentials and live a champagne lifestyle that you can’t afford.
In that case, we will cut the moment so that we can spend our money on more important issues.
2. Covering basic needs before repaying your investment or debt
Perhaps you’ve assessed your finances and found some amazing things. If you can’t afford your current lifestyle or are struggling to pay your bills without debt every month, it’s time to make some changes.
For example, before using my money to invest or pay off debt, I want to make sure I can pay all my basic necessary expenses. Rent, groceries, insurance etc. are all things I should pay before doing anything else with my money.
If you need to earn more money to provide basic invoices, consider a side hustle or a second job. This will allow you to change your focus to pay off your debts, investing, building emergency funds, and more.
3. Emergency funds will be built
It is crucial to have emergency savings in place as you incorporate your finances into your recession preparation. Having emergency funds in the midst of a recession can save a lot of stress. It acts as a safety net with enough money to help you during difficult times.
Avoid excessive economic expansion or the need to take advantage of debt. The importance of savings cannot be overlooked!
Saves 3-12 months of expenses
First, I would like to put aside the basic living expenses of 3-6 months in my emergency account at an unfortunate event that leads to unemployed.
Also, recessions can be quite unpredictable, so aim to increase your emergency savings to a 12-month essential cost in order to earn extra money if necessary.
That much of the cash gives you plenty of time to find a new job. But remember, in an economy that is experiencing a recession, it can be difficult to get a job.
Keep in mind that your basic cost of living is important to you for survival. Food, housing, core utilities, transportation. Building emergency funds is one of the most important steps in preparing yourself for a challenging age of finance.
4. Wise diversification will put your investment into a recession
I’ve heard the proverb, Do not put all eggs in one basket? Well, the same idea applies to your investment.
It is important to have a diversified investment portfolio, such as a three-fund portfolio. This means that all investments should not be bound by one share or one real estate property.
If one industry or region experiences a decline, we want to ensure that the investments are spread across multiple industries and sectors so that one investment decision does not sink the entire portfolio.
For example, when investing in the stock market, you can spread your investments across multiple sectors, such as consumer goods, healthcare, and technology. This is also known as broad asset allocation.
Investing in index funds and mutual funds is both a great way to diversify. You can also invest in the real estate market and small businesses.
How to invest wisely
As an investor, make sure you do your research, clarify your investment strategy and objectives, and understand risk tolerance. When a recession comes, it creates less panic for you.
The big mistake people make is that they start selling all the investments they own when the economy is immersed in feelings of fear and worry. It’s a bad idea in the long run.
If you have a clear plan for your investment and you are in it for the long term, you are in a good place. Your investment can make a bad economy worse and get on top.
If you feel confused or stuck about what to do, talk to your financial advisor. (Find it: Do you need a financial advisor?) Prepare for a recession by diversifying your investments wisely.
5. Repay high profit obligations
The last thing you want to do is worry about having to pay off debts due to poor economic conditions, especially due to the rising unemployment rate. When focusing on how to prepare for a recession, debt rewards must undoubtedly be a factor.
By paying off your debt, you save a lot of money on interest payments and end up in a better financial situation. Additionally, you can also invest extra money to increase your emergency savings and other financial targets.
So, as mentioned earlier, after the basic expenses are covered, you can use your excess income to pay off or save on your debt.
High profit debt is prioritized
Before considering increasing your investment, we recommend focusing on paying off your high-profit debt (which means investing more than your usual amount, but you should always invest).
If you have a high profit, your interest costs may far outweigh the profits of your investment.
For example, if you have credit card debt with an interest rate of 19%, it makes sense to pay off that debt as soon as possible, given that the average long-term profit margin in the stock market is around 8%-10%. If possible, reduce your credit card debt.
Obviously, the return rate can be much higher, but I would like to avoid guessing the market or trying to time it out.
Once you’ve lost your debt, you can focus on a higher percentage of investments. Find out more about creating a smart debt repayment plan, including how to use the debt snowball worksheet, and learn how to get started with your investment.
As a side note, if you have no other liabilities and your investment is on track, you may consider paying extra on a mortgage to pay off that liability.
6. Financial variable obligations to reduce risk
Interest rates usually fall during a recession. So you might be in a good position to refinance something like a mortgage or to think about the pros and cons of refinancing a car.
Having a variety of interest rates means that they can change over time, so it is usually ideal to get a fixed interest rate on your debt.
If that makes sense to you, take advantage of the possibility of lowering your debt. Remember, refinancing applies only to debts you already have.
A recession may not be the best time to take on new debts unless necessary. No matter what, there is always a pay-off plan.
7. Create a budget for the recession response and live under your means
Living under your means, or at least in your means, is the key to building wealth. It also means eliminating that you have to utilize your debts to live your life – you will not use a credit card to pay your bills. This is where your budget comes in.
Use your budget and focus on financial security
Your budgeting style will determine what’s best for you and learn better budgeting techniques. A budget helps track your expenses compared to what you’ve earned and highlight areas you can cut.
Your ultimate goal is to widen the gap between your income and costs as much as possible. You do this by finding ways to increase your income and reduce your costs. As mentioned before, instead of luxury, spend it on essentials.
The rest of the money can be used to generate financial security. This can be achieved primarily by saving, investing, paying off debts, and making your money work.
Make plans for how much you want to save, what other sources of income you can create, and how you can pay off your debt. Then give all the attention and spare money to those goals.
When you progress towards your financial goals, you refuse to upgrade your lifestyle. When you’re in a better financial situation, you have time to do that, but if you’re focused on preparing for a recession, don’t spend it on things you don’t need now.
If you continue with your plans, you will be in a much better place with your money.
8. Find ways to create multiple income streams
Billionaires usually have several sources of income. Creating multiple sources of income will help you increase the amount you come in and increase your peace of mind amidst financial uncertainty.
It also acts as a buffer if you lose your source of income. This is how you can start making more money.
Starting the side hustle
Is there anything you’re passionate about what you’re doing? Do you always get compliments for what you do?
Consider starting a side hustle to generate additional income. There are also businesses that can withstand a variety of recessions that you can consider.
For me, starting side hustles allowed me to increase my savings, pay off my debts and prepare me for a generally challenging financial situation.
Consider passive income opportunities
Setting up a passive income stream is also a wise idea. Passive real estate investments, such as REITs (real estate investment trusts), royalties, and selling digital products like e-books, are all sources of passive income that can help you during difficult times.
Dividend investments are also passive sources of income, so that you can become a landlord. There are many opportunities, so find out which resources work for you, as you consider the resources you have.
9. Double-income household? Learn to live with one income and save the other income
One of the smartest financial moves you can make to prepare for a recession is to move into life with one income and save the other income. By becoming frugal and reducing costs in your budget, you can free up a lot of money to save money on rainy days.
The goal is to cut costs of living sufficient to fully free up your second salary.
Emergency funds are all bundled and do not rely on a second income in the event of unemployment. Living under your means is the best way to prepare for the unexpected.
10. Find jobs that will withstand the recession and remote work opportunities
Another way to prepare as an employee is to consider jobs that will withstand the recession. Healthcare workers, teachers and pharmacists are types of jobs that are in demand even during recessions.
If you’re not looking for a job, it’s still important to prepare. Expanding your skills is great for job security, especially when it comes to pay and working remotely.
Add new skills to your resume and get ready in case someone is hiring for a job that interests you.
Another idea for a job is remote work. Businesses are shifting more towards remote locations than ever before. With the number of best jobs from working from home on the rise, you may consider applying to some people or starting a home business.
Not all remote jobs are a good choice in times of recession, but having it as an option is helpful.
Expert Tips: Worst Plans, Best Places
Recessions are part of the economic cycle – we cannot avoid them, but we can prepare for them. My best advice? I hope things are stable. They act as if the recession is always turning the corner. This means having emergency funds, maintaining budget scope, building multiple revenue streams, and keeping your skills sharp in case you need to pivot.
The goal is not to panic, but to lead uncertainty into the weather without fear. When you prepare to expect a recession, you are much more likely to thrive when it actually happens.
How much money do you need to survive the recession?
In order to prepare for a recession, it is best to save at least three to six months’ worth of essential living expenses saved by the emergency fund in most cases. This includes housing, food, utilities, transportation and healthcare.
If you are working in a field that could be more deeply affected by the recession, or if you are a part of a self-employed or single-income household, we recommend offering a larger cushion, aiming to save 9-12 months.
The goal is to avoid relying on debt while navigating financial uncertainty.
What should I buy in a recession?
When preparing for a recession, focus on spending on essentials like groceries, healthcare, and household essentials.
It’s also a wise time to invest strategically. Stocks, index funds, and real estate are often “on sale” during recessions, as long as they are financially safe and invested. Luxury or non-essential purchases should avoid buying unless they are significantly discounted and have already achieved their savings goals.
What happens to bank money during a recession?
As long as the financial institution has FDIC insurance (up to $250,000 per depositor, per account type), money in the bank remains safe during a recession. However, you may notice that interest rates on your savings account and CDs are low. This is typical during a recession. Usually, you don’t need to withdraw money unless you need access to emergency funds.
Generally, there is no reason to withdraw money from the bank during a recession. It’s also not wise to panic and pull out your investment.
It’s about waiting for the economy to return to normal and knowing that your money is still in the bank. Also, stock markets generally work over time, so leaving only investments is a good idea.
How much money should you hold on to the recession?
It is wise to hold enough liquid cash to cover your essential costs for at least 3-6 months. If you want even more peace of mind, saving up to 12 months of emergency savings is a solid strategy. Beyond that, it is usually better to invest excessive funds to avoid losing purchasing power to inflation over time. Too much cash you sit down can reduce your long-term returns.
How can you make money in the recession?
There are several ways to make money during a recession. It focuses on recession-bearing jobs and side jobs such as healthcare, education, home repair services and online freelance jobs.
You can also sell unused items, start low-cost businesses, and create passive income streams such as digital products and dividend investments. The key is to search for opportunities in demand during the economic downturn and build multiple revenue streams to enhance financial resilience.
Plus, if possible, keep making money as usual by not quitting your daytime work. One of the best ideas for biggest financial security is to have a full-time job and side hustle. The more time you work, the more prepared you are and the more financially healthy you are.
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Take advantage of these tips on how to prepare for today’s recession!
While we can’t predict when a recession will occur, it makes sense to always prepare for major life events. Apply these tips to help you make good financial decisions.
That way you will never be financially off guard and will secure anywhere to prevent a financial disaster. Trying an extremely modest life, inflate your savings and creating multiple income streams can help you ensure your financial health