Are you recession-ready? You should be. After all, whether you’re in your twenties, thirties, forties, or beyond, you’ll surely live through more than one economic downturn. Why? Because recessions are an inevitable part of business cycles.
Even if you have a stable job, a business, or fixed money coming in, no one is immune, which means the money flow could stop faster than you could imagine.
For example, when the coronavirus pandemic broke out, over 30 million Americans lost their jobs in a matter of weeks as companies shut down and the economy abruptly slowed nearly to a standstill.
But, what exactly is a recession? A recession is defined as a period when the economy declines for 6 months or more. That is much different from a depression, which applies when the economy is in recession for two or more years, and the decline is higher than 10%.
History of bear markets in the last 40 years:
The last recession started in October 2007; it lasted 17 months, and GDP declined by 5.1%. This is often referred to as the great recession.
So, how do you survive a recession? You do it by preparing, building an emergency fund, managing your monthly costs, by protecting and creating multiple income streams.
Preparing For a Recession
Even if the economic outlook is looking grim right now, you can begin taking steps that will bring your finances in order. The goal is to equip yourself with the tools that will help you whether the recession successfully.
Create an emergency fund. This one is financial planning 101; every expert financial planner expert will recommend creating an emergency fund as a first step. Yet many people, even middle-class workers, are still living paycheque to paycheque.
An emergency fund is your safety net and your first line of defense amidst a recession. Yes, saving money is hard when you don’t have a plan, but what if you have a plan?
For more on this, check out my article How to build an emergency fund.
- We recommend building an emergency fund that would cover three months of your income. No ifs, no buts – it’s possible to do it. This is especially important if you have fixed expenses like a mortgage or loans.
- When you start saving, you’ll begin to spend more wisely. Then, automate your savings by getting your bank to deduct an amount from your account and deposit it into a saving fund.
If saving 3 months of income seems like a daunting task, save whatever you can; any amount you save will help, even if that means you just save a thousand bucks.
Pay off debt. Besides income, nothing can slow down a financial plan faster and harder than debt; get rid of it. First, start by paying high-interest debt such as credit card debt; then move on to lower-interest accounts until you’re debt-free.
The faster you pay off consumer debt, the more money you will have available to save for “a rainy day.”
For more on this, check out my article How to pay off debt fast.
However, if you’re in the midst of a recession and have bills to pay but not much money, protect your cash even if this means paying off debt later.
Protect Your Job During a Recession
This is not a time to slack off. Ask yourself these two questions:
- How can I be more valuable to my employer?
- How can I improve my value as an individual?
Strive to be the employee of the month and ensure that your reputation is perfect; when layoffs happen, the company will start with the weakest employees.
Be ready for a layoff. Some things cannot be prevented and losing your job during a recession is one of them. This means you have to be ready; start by updating your resume and LinkedIn profile, which will help you move forward quickly searching for a new job.
Make your LinkedIn profile has a picture and details about your experience and accomplishments, both academically and work-related.
Also, prepare a list of colleagues or people you know; contact them to ask if they know of job opportunities that you can apply to. This is how many jobs are filled, so don’t be shy, use it.
Use your company benefits. If you’re employed, this is a good time to use company benefits because you may very well lose them.
Diversify your income. Achieving financial independence starts with building multiple income streams; if you have a job, that fine. That’s just one stream of income. To diversity your income, you have to create at least two more income sources.
I can’t emphasize how important this is. The idea is to lower your dependency rate. When you have multiple income sources, you’ll depend on yourself instead of your boss.
If you need more ideas on how to make extra money, check out my article 21 ways to make extra money.
Invest in yourself and your ability to earn more money. Think about your career path and look for online courses that can help you boost your resume. Finding a mentor can help too.
So, identify a person within your professional or personal network and ask them to be your mentor. Don’t wait until you’re jobless to invest in yourself.
Postpone Making Expensive Purchases during a recession
During a downturn in the economy, consumer spending behavior changes. Suddenly buying a high-end car, expensive accessories, or even going on vacation is not on top of your wish list. That’s right, during a recession, luxury spending and big purchases take the backseat as consumers focus on what matters.
For example, according to a study put together by Globalwebindex.com, 40% of consumers globally said they would not make major purchases until the coronavirus pandemic has ended in their country.
That happens because when a recession arrives, expensive purchases take a hit first. So, don’t buy things that depreciate in value, such as a TV, a car, or an expensive renovation. Stop trying to impress your neighbors or friends.
Exhibit showing the percentage of people who say they’ve delayed their spending following as a result of coronavirus/Covid-19 pandemic.
The thing is, as the market declines, high-end products or expensive purchases are the most vulnerable as consumers focus on buying essential items.
This means, during this time, you don’t want to take a huge mortgage or buy a big house. Why?
Because it’s possible that in six months or a year, those assets could decline in value.
Reduce your monthly expenses during a recession
Have you heard the expression “cash is king”? It truly is, and you must try to keep as much of it as possible. This means you have to track and understand where and how you’re spending your money.
This is a good time to evaluate how much you spend and find a better alternative. The easiest way to do this is to list out all your expenses and an alternative while selecting the best alternative based on your preference.
Here are a few ideas for reducing your expenses during a recession:
- Ask for a price reduction: Call your service provider for things like cell phones, internet, and TV to ask them for a rate reduction. Chances are you’ll get it. Those companies want to keep you as a customer, so if you ask them for a discount, they’ll likely grant it to you.
- Request a reduction fee from your car insurance provider: If you’re not driving to work every day, it means you’re driving a lot less than normal, so you should quantify to receive a fee reduction from your car insurance company.
- Review your mortgage: During a recession, interest rates drop, so if you have a mortgage, evaluate whether you can refinance your mortgage and lock in a lower rate.
- Refinance high-interest debt: If you have high-interest debt such as credit card debt, now it’s the time to either pay off the debt completely or move the balance to a 0% introductory offer or even to a line of credit if your line of credit has a lower interest rate than the credit card.
- Earmark your spending. Dave Ramsey calls this the envelop system. This means you need to allocate a dollar amount for every category, such as food, housing, savings, etc. That way, you know where your money is going and can begin taking control of your money.
One great way to efficiently tracking expenses is by using our budgeting binder planner; this budgeting planner will help you get on top of your finances and begin to achieve your financial goals.
Budgeting Binder Planner
This 31+ page printable digital binder planner will help you take control of your finances, and set clear financial goals, so that you can get out of debt.
Apply for government assistance programs
If you lost your job, you might qualify for unemployment payments. Some people wait until they run out of money to apply for unemployment benefits. There is no need to wait; apply as soon as possible as there will be a few weeks delay from the time you apply to the day when the money is finally in your account.
Apply for as many government assistance programs as there are available. Also, ask the utility company for a discount. Utility companies typically offer discounts to low-income families, so if you lost your job, that might qualify as low-income.
Should I pay my bills if I don’t have a job?
During a recession, the most important bills to keep paying are food and shelter. You should continue paying the mortgage/rent, the utility bills, and make sure you have enough funds to cover food expenses. Everything else can wait.
Make a list of all your monthly bills and call every single one of them. Explain your situation and ask if they have discount offers for people experiencing a temporary loss of income. Even if there are no discount offers, you may be able to defer payments for a few months.
Money-saving tips to stay resilient during a recession
- Keep adding money to your emergency fund: You have to realize that emergencies will happen; for example, your car might need an expensive repair, or the air conditioner could break down. Without an emergency fund, people have no other option but to use a credit card and then take forever to pay it back.
But that won’t be you, right? Some banks allow you to create multiple accounts so that a portion of your income goes directly there. An example could you the vacation fund.
If you’re planning to take a vacation in one year, what you want to do is start saving now. This is what people call “pay yourself first”; however, most people decide to pay other things first. That’s a mistake.
In other words, if the trip is going to cost you $2,000, you can start saving $170 per month for a year, so when vacation time comes, you have the cash vs. paying with credit and taking longer than a year to pay off the credit card.
- Prepare a budget: To successfully navigate a recession, you’re going to need a budget. That’s right – you have to decide how to spend your money before you get paid.
That’s the way how highly successful people achieve results; they wake up early to take care of their top priorities first before their day gets hijacked.
Without a budget, your money will be hijacked by other less important things than paying yourself first. For a template to help you set up your budget quickly, check out our budgeting binder planner.
- Automate your savings: Let’s face it, saving money takes discipline, and many people lack the willpower that’s required to save money month after month. Automating your savings allows your lender to automatically redirect money to a different saving account as soon as you get paid. Out of sight, out of mind.
- Don’t change jobs just yet: It’s a bad idea to change jobs during or right before a recession. Even for those who find another job, if the company begins to experience financial difficulty resulting from the recession, your job will be at risk.
Protect Your Retirement Savings During a Recession
- Reduce risky investments: When you’re young, you still have many years ahead of you before retirement; thus, you’ll want to invest in stocks as these provide higher returns than bonds. If a recession comes and the S&P drops 5,000 points, you’ll have time to wait for the market to recover from a recession.
However, for those who are in their late 40s, you’ll want to adjust your asset allocation to lower risk assets as losses during a recession could set back retirement plans by 10 years or more.
Keep in mind, though, that taking investments out of the market can help in the short term, but at the cost of long-term disadvantages for when the market recovers.
- Diversify your investments: If a big portion of your investments is allocated to one sector, that means your portfolio has a higher market risk. So, if you have money invested in stocks but none in bonds, it means you’re overly invested in stocks. The key to a well-balanced portfolio is diversification over a range of asset classes.
3. Don’t panic sell your investments: Retirement is typically a long-term goal. During a recession, everything goes on sale; you don’t want to be on the losing end. Thus, keeping your money invested long-term will allow the market to recover, vs. panicking and selling everything.
Take advantage of a downturn in the economy
The translation for the word crisis in Chinese is “Weiji,” which literally means “danger and opportunity.” That actually makes sense because every crisis brings opportunities, and a recession is no exception.
While for many, a recession may be time for financial distress, for the financially well-prepared, it could mean a chance for getting great deals.
Start by improving your credit score. You might wonder why it’s important to improve your credit score when a recession is coming; well, when the economy is tanking, prices of assets go down in price. Interest rates will drop too, but banks won’t easily extend loans unless you have a great credit score.
This means you’ll be able to get loans to take advantage of a great deal, such as buying a house at a good price.
Whether you like it or not, opportunity favors the financially prepared. While for many people, recessions are a time of financial distress and anxiety, for those who are well prepared, it can mean a time to get great deals.