With all the ups and downs in the market and all the doom and gloom in the headlines, it is hard not to wonder if all the headlines are true. If some form of recession were to happen, it is best to be prepared.
Before we get into how to prepare for a recession, we should first define what a recession is. A recession is defined as; a period of economic decline in which trade and industrial activity are reduced, generally identified by a fall in GDP in two consecutive quarters.
Some general characteristics of a recession include:
- Real GDP decreases;
- Firms faced with unwanted inventories and declining profits reduce production, postpone investment, curtail hiring and may lay off employees;
- Business failures outnumber start-ups;
- Falling employment erodes household income and confidence; and
- Consumers react by spending less and saving more, which further cuts into sales, fueling the recession.
When these recession indicators are seen in our economy, what is the best way to make sure that assets are protected?
Build an Emergency Fund
When a recession or market downturn strikes it can seem quite sudden. During a recession the financial situation can turn on it’s head: the economy lags, job losses increase, and thus begins the downward spiral. For this reason, having an emergency fund is crucial.
An emergency fund is money that has been saved up and set aside for the sole purpose of getting through day-to-day living during financial downturns.
When building the emergency fund we recommend having 3-6 months of living expenses in cash. If the feeling of a recession is imminent, aim to have 6+ months worth of expenses saved up.
It is always better to have more funds than needed. The need for an emergency fund may never arise, but we never know what the future holds.
Between 1945 – 2001 there were 10 cycles with the average recession lasting 10 months. Recessions usually last longer than expected so it is always good to have more funds available than originally thought necessary.
Make Sure Assets are Diversified
Having diversified assets is something that is often recommended. This is even more important in times of economic downturn.
If all assets are tied up in one stock, industry, or even country, the downturn can be more dramatic. With well diversified assets, risk is reduced and the likelihood of an extreme decrease in net worth and savings is lessened.
To find out more on diversifying assets, read our previous post What Is True Diversification?
Pay off Debt
Paying down debt is always a good idea. Leading into a recession, this is even more important. In times of a recession paying for day-to-day expenses can get tough, never mind potentially higher interest payments.
Having high levels of debt can be extremely risky. There are so many external variables that can cause the debt table to tip and spiral out of control.
If you have high-interest loans, try to consolidate them into a single loan with lower rate and pay it down quickly. You never know what variables (job loss, interest rate changes, etc.) might change causing you to no longer afford the payments.
A great first step to paying down debt is creating a budget. Make a budget and track all your finances. Doing this for 3 months gives you a pretty good picture of what your finances are doing. Are you overspending on eating out? Could you maybe cut back on shopping?
Lower Your Expenses
During recessions, money can become extremely tight. It will probably be easier to lower expenses than try to increase income during a recession as jobs are hard to find.
Lowering expenses is always a good thing as it will help preserve cash flow during the recession. Not only that, if you lower expenses before the recession you will be able to save more.
The easiest way to lower your expenses is to keep a budget. Track where all your money comes and goes for at least 3 months. This will give you a good idea of your financial situation. Having tracked expenses for 3 months you will be able to see where expenses are high and where you can cut back.
Don’t Base Home Buying/Ownership Decisions on The Next Recession
Buying or selling a home based on a recession or the idea that a recession is going to happen soon, is not good.
Buying a house is a long term investment. Just like investing is generally a long term game.
Yes, buying and flipping homes can be profitable but that is a business model. Flipping is extremely different than selling your personal residence because you think the value will drop.
As long as you can truly afford your house and the payments, a recession should not affect your financial situation.
Just because the appraisal value of your house has decreased, you haven’t actually lost money. It is considered an unrealized loss. You only lose money and net worth once the house is sold and loss realized.
Make Sure You are Employable
When a recession hits it can cause a domino effect. If one of those dominoes that falls is your current job, you have to make sure you can find a new one.
During a recession, lay offs and job loss is a lot more common. Consumers are spending less, companies are making less money, and more businesses are failing. All this leads to more people needing to find new jobs.
One of the best and easiest steps to making yourself more employable is updating your resume. Make sure your resume looks professional and has relevant information.
Note: Volunteer experience always looks good on a resume.
Another way to make sure you’re a good candidate for a job is to work on your soft skills. Soft skills are generally harder to teach. A lot of employers value soft skills as much as hard skills.
Soft skills are personal attributes that allow someone to interact harmoniously with others. Things like people skills, social skills, emotional intelligence, communication skills, are examples of soft skills.
Hard skills, on the other hand, are specific, teachable technical abilities that can be measured. Examples of this would be typing, writing, math, and reading.
Lastly, make sure you are prepared for the interview. This doesn’t just mean you’re at the interview on time. It means you’ve dressed appropriately, you have researched the company, and you have some intelligent questions prepared for the interviewer.
Recessions are a tough time for the majority of people. Finding yourself in an economic downturn unprepared is unwise. Use the steps above and make sure you are prepared for any tough times that might lay ahead.
Share your thoughts with us!
If you enjoyed this article please like, comment, and share it with your friends. Also, follow our blog for great original content every week.
Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy.