How to Prepare for a Recession (8 Proven Strategies)
You do not have to be an Ivy League analyst to realize that the economy – and stock market – is going through some serious ups and downs now.
In fact, you can see that:
- Businesses are closing.
- National debt is soaring.
- Interest rates have decreased.
- Stocks have gone up and down.
- Unemployment claims remain high.
And you can also feel a sense of uncertainty in the air.
So, if you are worried about the next recession then you have come to the right place.
Let us walk through the 9 proven strategies on how to prepare for a recession below.
What is a Recession?
First, it is important to understand that the markets go through cycles. They go up and they go down,
The historical data suggests the following:
- What comes up, must go down.
- What goes down, must come up.
To be a little more technical, you can see that the stock market has periods of growth and periods of decline.
Recession Defined: A recession is a temporary period of decline in the stock markets and economy.
The emphasis is on the word “temporary.”
The technical definition of a recession is the following:
- 2+ consecutive quarters of negative growth in the nation’s gross domestic product (GDP)
A GDP is the total value of what is produced (goods and services) within a country’s borders.
Check out the chart below, which can give you a better idea of GDP by country:
As you can see, the U.S. is the top producing country, followed by China and Japan.
Back to the subject at hand: What is a recession?
Additional indicators that could suggest you are in a recession include:
- Rising unemployment
- Decreasing stock prices
- Reducing real estate value
- Eroding consumer confidence
Consequently, a recession could seriously impact your personal finances.
That is why it is important to prepare for a recession today.
And if you have lived through the Great Recession of 2008 or the very recent COVID-19 related recession of March 2020, you will remember that feeling of anxiety.
Pro Tip: Try tuning out the media when you know you are entering a recession. The media know that fear sells, so expect to see stories of doom and gloom.
Remember that every time the economy went down, it also went back up.
So, you have every reason to feel confident that you will not lose your money in a recession.
In fact, you can make some serious gains in the stock market – if you play your cards right.
How Long Does a Recession Last?
According to the National Bureau of Economic Research, a recession typically lasts around 11 months.
However, recessions are not made equally.
Recessions can be:
- Long and mild
- Short and mild
- Long and severe
- Short and severe
I am sure you may still remember the sting from the Great Recession of 2008.
Pro Tip: If you continue to make regular investments throughout a recession and buy stocks when they are priced very low, you can still make massive gains in the long run.
What Happens During a Recession?
Basically, the economy takes a nosedive when you are in a recession.
Here is probably what you will see during a recession:
- Increased layoffs.
- Decrease in wages.
- High unemployment
- Increased government debt
- Stocks and bonds fall in value.
- Decrease in consumer spending.
The Bottom Line:
When the economy recovers, the negative trends of the recession will also start to recover. You just must focus on the long term.
How to Prepare for a Recession
There are a few ways to prepare for a recession, which we have outlined below.
Although no one has a crystal ball to tell you when the next recession will come, you can tell from history that each recession is followed by tremendous economic growth.
So, remember to investigate the long-term and know that 99% of the time, you will see much better economic growth after a recession.
Let us get started.
- Increase Emergency Savings
Before you even think about investing, first consider how much cash you have saved up.
That is why you want to have a solid emergency savings fund ready to go in the case of a recession.
Pro Tip: To have a “good” emergency savings fund, you will want to have 3 to 6 months’ worth of your living expenses saved up.
So, if you spend about N3,000 per month on basic living expenses, including:
- Student loans
…Then your emergency savings fund should have between N9,000 to N18,000 saved in cash for emergencies.
It is not much compared to where interest rates used to be 20 years ago (we’re talking 2% to 3% or higher), but those rates are the highest in the current market conditions.
- Pay Off High-Interest Debt
Debt is terrible in any type of economy – but it can especially be a heavy burden during a recession, where fears of unemployment (and consequently no income) may be in the air.
Below are some examples of high-interest debt:
- Payday loans
- Credit card debt
- Other personal loans
Basically, you want to start paying off debt with interest rates of 10% or more as fast as possible.
When you pay off your debt, you have fewer payments due, which can help ease your mind, especially during a failing economy.
Once your debt is paid off, you can use your money to:
- Invest in the stock market.
- Pay off other, lower interest debt.
- Put toward your emergency savings.
Check out the 5 key benefits of debt consolidation:
- Decreases your stress.
- Ability to pay off debt faster.
- Could improve your credit score.
- Typically, you pay lower interest rates.
- Instead of making multiple payments, you only pay 1x.
- Stick to your Budget
If you want to prepare for a recession, you must learn to live within your means.
Here is the simple formula to sticking to your budget:
Budget Formula: Expenses < Income = Becoming a Millionaire
In other words, your expenses must be less than your income.
A budget is a millionaire planning tool to help you optimize your money so you can build the future you want. Sticking to your budget – and not spending more than you earn – is going to be SUPER helpful, especially when a recession is looming on the horizon.
By living frugally, you can free up a lot of your money to:
- Pay off debt.
- Invest for retirement.
- Use toward emergency savings.
- Cut Down Expenses
As your income increases, it is probably a good idea to check out where you can cut costs and save more money.
In addition to sticking to your budget, as discussed above, it is also important to avoid allowing lifestyle creep to nibble away at your net worth.
Lifestyle Creep Defined: Lifestyle creep happens when you spend more money as you earn more money.
Instead, try training your mind to save more money as you earn more money (and keep your expenses the same).
Since the chances of your income being slashed or eliminated are high during a recession, you want to make sure you can live without certain expenses.
That is why it is important to learn how to cut costs before a recession hit.
Below are some easy ways to cut costs fast:
- Cut the cord.
- Find a roommate.
- Go thrift shopping.
- Terminate subscriptions.
- Bargain with your utility companies
- Diversify your Investments
Have you ever heard of the saying: “Never put all of your eggs in the same basket?”
Well, the same goes for your income streams.
Imagine depending on just 1 income stream during a recession… and then facing the reality of being let go from your company.
Without income, it is going to be hard paying for your regular living expenses – not to mention the difficulty of finding a job during tough economic times. So, do not rely on just your 9 to 5 job.
There is a reason why the average millionaire has 7 income streams.
- Become a Side Hustler
If there is one thing I learned, it is this: Start building your side hustle as soon as possible.
I’m sure you can already tell what my favorite side hustle is… it’s blogging!
Check out the top 3 side hustles and their monthly income potential:
Now keep in mind, you probably will not see numbers even close to the numbers above within the 1st, 2nd or likely even 3rd year of pursuing your side hustle.
But, if you:
- Are consistent.
- Are committed.
- Stick with your plan.
…Then chances are, you will likely succeed.
- Live on 1 Income Stream
This rule of thumb only works if you live with your partner and both of you are earning income.
One of the best ways to prepare for a recession is if you and your partner live below your means by:
- Saving 1 income stream
- Living off the other income stream
Living off only 1 income stream can help you with the following:
- Pay off debt.
- Save for retirement.
- Keep investing during a recession.
- Increase your emergency savings fund.
The Bottom Line:
If you practice living off only 1 income stream when times are good, it is going to be very easy for you and your partner to live off 1 income stream, should (worst case) 1 of you lose your jobs during a recession.
8. Invest in Yourself
One of the key outcomes of a recession is high unemployment.
And even though you may be completely crushed that you were let go of your job, you can use that opportunity to invest in yourself.
That is of course assuming you have:
- Paid off your debt.
- Additional income streams
- Bulked up your emergency fund.
How do you survive a recession?
You can survive a recession if you prepare properly beforehand.
Some steps you can take include:
- Invest in yourself.
- Stick to your budget.
- Live below your means.
- Build an emergency fund.
- Build extra income streams.
- Diversify your investments.
Credit – MMW.
Remember, while you prepare for life during the recession, we would encourage you to start a passion project, something you love to do without much effort, monetize it and make the most out of it. We are here to provide quick loans for you. Get Quick unsecured loan without collateral, no guarantor, no account opening. Credit Direct Limited enables your peace of mind.
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