Sadly, a recession is something we can't control; they're just something people have to live through. That being said, there are many ways to remain savvy during the decline of economic activity, so a person isn't blindsided and loses all of their money.
From something as simple as setting up an emergency fund to utilizing company perks and contributing to a retirement fund, here are a few tips on how to prepare for a recession.
Set Up An Emergency Fund
A dip in the economy puts our finances into serious jeopardy, especially day-to-day spending. In order to beat the recession head-on, you need to bolster your savings, AKA beef up your emergency fund. This is money that you set aside for a rainy day.
Stashing away a portion of your paycheck each month can give you a healthy financial cushion in the event of a recession. The rule of thumb is to have six months' worth of living expenses in your emergency fund. You can even opt for a high yield saving account to earn more interest on the money that you set aside.
Limit Your Expenses
We all work hard for our money and want to enjoy the fruits of our labor, but as a recession approaches it's time to exert greater control over your spending habits. Downsizing and adopting a frugal lifestyle can help increase your savings as you learn how to do more with less.
You need to break down your monthly expenses and identify the items you don’t need and those you consider a necessity. Alternately, you can curb your spending by bringing your lunch to work every day or skipping the Starbucks lattes. These small expenses tend to add up over time.
Pay Off Your Debts
As you journey on your quest to a recession-proof life, your goal should be to save as much as possible. One way to give your savings more breathing space is to tackle your debt head-on. Long-term debt has the ability to spiral out of control so paying it off can give you instant gratification.
During an economic downturn, many people find their job security at stake so taking care of your short-term debts will provide a comfortable financial cushion. This can include paying off credit card debt, student loans, auto loans, and even mortgages. While this may put a dent in your savings in the short-term it can result in large gains over a period of time.
Get A Side Hustle
The rise of the gig economy has made the concept of a side hustle more popular than ever. There are a couple of ways to do this: you can either set up your own business or take the freelance route. A side gig is not only a great way to pursue your passions but also helps you make a few extra bucks to supplement your income.
As you prepare for the next recession, consider getting a side hustle as an additional income stream. This money can be used toward paying down your debt or building up that emergency fund. Having greater control over your income and being your own boss is incredibly rewarding.
Create A Budget
The best way to recession-proof your life is to have a plan of action. If you don't know what your goals are, then there’s no way for you to get there. A budget serves as a roadmap that tells you exactly how you need to juggle your financial obligations to prepare for an economic downturn.
When creating your budget, make sure to prioritize your savings followed by your basic living expenses and paying off your debts. This also helps you keep track of your spending habits so you can make changes as required. Maintaining a healthy financial diet is an empowering feeling that can help you reach all your financial goals!
Gain New Skills
One of the best investments you can make in your life is in yourself. The beginning signs of recession are reflected in the unemployment rates, and the people who don't have in-demand skills are the ones who get weeded out first.
Many economists claim that education serves as a financial buffer during a period of economic downturn. A broad set of skills can help you stand out from a pool of employees and give you an edge when you need it the most. You can either monopolize on a certain skill or gain new skills to supplement your existing ones.
Live Below Your Means
As you cut back on your expenses, it is wise to device a spending plan to live within or below your means. Economists suggest that you should only use 30 percent of your income for day-to-day expenses.
Expenses like your insurance, food and gas are all necessities that you need to set aside some money for. But fancy dinners, travel and expensive things are a luxury and is considered discretionary spending- that is things you can live without. As you prepare for the recession, make sure to cut back on any splurges and live within or below your means.
Create A Risk Profile
Every decision we make comes with a certain amount of risk and on your journey towards a recession-free life, it is essential that you keep your risks to a minimum. A great way to fool-proof your finances is to work with a financial advisor. They can help you understand your risk-appetite, that is, how much risk you are able to withstand or take on.
Keeping a check on your risk profile is essential, especially from an investment standpoint. If you find that your risk tolerance is not as high as expected, you can take proactive steps to rectify this through diversification or making safer bets.
Network, Network, Network
Whether you're just starting out or well-established in your career, networking is paramount to success. Although networking can be an intimidating experience, there are many ways to forge those strong connections with your peers. You can take to LinkedIn or join a professional group to meet more people with common interests.
Leveraging your network is especially important during periods of an economic downturn. These connections can help you get through those hard times and may open doors to new opportunities. However, when building your professional network, a simple LinkedIn connection won’t suffice. You need to take the time to create a mutually beneficial relationship with the person.
Maximize Your Value
A period of recession is often spearheaded by layoffs in many organizations. So in order to safeguard your job during a slow economy, it is important that you demonstrate your potential and show your worth. The old adage "nothing succeeds like success" could not hold truer than during a recession.
Make yourself invaluable at your job by showcasing your exemplary work and performing your best. This can help you stand out in the crowd and open new doors of opportunity during a period of layoffs. Alternatively, learning new skills coupled with a strong work ethic can provide greater job security in the long-term.
Don't Put All Your Eggs In One Basket
While additional income streams can recession-proof your finances, it also important to diversify your investments. Having all your income tied up in a single investment is a recipe for disaster, especially during a period of recession. It can affect your financial safety in the long term
Diversification involves investing in a wide range of to safeguard your portfolio. This can include different assets or even industries. Real-estate, stocks, and gold are the most common types of investments as their value are known to appreciate over time. However, for a truly diversified portfolio, you can also consider bonds, mutual funds, or bitcoin as potential investments.
Improve Your Credit Score
In a perfect situation, you would have sufficient funds to help you weather the recession. In reality, this is not always the case. This is why many financial gurus recommend building up a line of credit while you are still employed.
A good credit score can be a lifeline during an economic downturn as banks will be more willing to lend you money. Maintaining a credit card or two can not only help you increase this score but can also see you through the first few months of a downturn. You can take out a line of credit on a new equity loan or a credit card.
Modify Your Tax Withholding
There's a good chance that a visible chunk of your paychecks goes towards taxes, and when you file your taxes at the end of the year, the IRS refunds a portion of your taxes that are withheld by the government. This essentially means that the taxes paid are an interest-free loan for the government.
While safeguarding your finances from the next recession, it is likely that cash flow will be a little tight during the first few months. Alternatively, you may need the money to pay off debt or stock up on that emergency fund. To ease the financial burden, you can adjust your tax withholding so you can meet immediate expenses. All you need to do is submit a W-4 form to your employer.
Sell The Company's Stock
With the economy on the brink of a recession, it would be a risky move to use your 401K money to invest in the company's stock. While this may generate returns in the short-term, it could very well lead to large losses when there is a downturn.
In order to stay prudent about your finances, it is recommended that you sell the company stock in your 401K. In the event that the company lays you off or goes under, you lose your income as well as any earnings from your stock. As the saying goes, "prevention is better than cure."
Don't Stop Investing
A downturn in the economy can signal a red flag to investors to reevaluate their investments. However, it doesn't mean that you need to stop investing altogether. During a bear market, many investors believe they need to convert their investments to cash. This is one of the biggest mistakes an investor could make.
While investors are busy pulling their money out of the market, they could subsequently lose out on many years of profit. Once the stock price increases, it can be expensive to enter the market again. Hence, during a period of recession investors should not panic but keep investing and weather out the storm.
Make Use Of Company Perks
A recession is a period of uncertainty for many companies and employees. Like the crisis of 2008, a single event like a real-estate crash can topple the entire economy. As an employee who is unsure of their job security at a firm, it is recommended that you use company perks before you lose them.
Many companies offer discounts and gym memberships so take advantage of these benefits while you can. Alternatively, layoffs also signal the demise of your health insurance plan. So make sure you use the health insurance benefits before it's too late.
Contribute To A Retirement Plan
Your company's 401K plan and IRA Roth can serve you well in the future and ensure that you're more financially independent. Many people believe that contributing to these retirement accounts during an economic downturn is counterintuitive but this is far from the truth.
While the value of your stocks may decrease during a recession, you are still backed up by the benefits of the dollar cost, averaging and time value. Just like a gravitational force, what goes up, must come down in the stock market as well. Therefore, maintaining your 401K and IRA Roth contributions is a more disciplined investment approach and can guarantee higher returns over time as you ride the recession wave.
Stay On Top Of The News
Unfortunately, no one has no way of knowing exactly when the recession will hit. Thankfully, there are many indicators of a looming economic recession. It is the role of economists to assess these factors and provide updates on the state of the economy.
A sure-fire way to safeguard your assets from the recession is to stay up to date on the news. Publications like the Wall Street Journal and the New York Times provide an in-depth analysis of the economic conditions. This information also provides an overarching idea on how you should prepare for the recession.
Update Your Resume
While you can recession-proof your life, you can't do the same with your job. Many skilled employees face the risk of losing their jobs during a recession so you always need to be prepared to seek employment. This involves keeping your resume up to date with the most relevant skills and experience.
Make sure your resume is short and concise -- don’t inflate your skills or ramble. You can also brush up on your skills to showcase your talents to employers. You may never know when you may need to send out a resume, so keeping one handy at all times can prove to be useful.
Have A Plan
The economy is hard to predict and nobody knows exactly when a recession will hit. While an economic downturn may be on the horizon, we need to be prepared for the worst. This means you need to have a plan of action when the recession hits.
While many investors may panic and sell their stocks when the market takes a nosedive, it is important to remain rational and remember that the markets will settle eventually. Alternatively, an emergency savings fund and a backup plan in the event of unemployment can help you be more prepared to weather the economic downturn.