Looking out over the financial horizon waters, it’s easy to believe that the calmness we’re experiencing now is here to stay. Inflation is low and job growth is strong. However, depending on who you talk to, a recession could be much closer than it feels. This is precisely why now is the second-best time to prepare for an economic downturn (the first being yesterday 😉).
All jokes aside, if you wait until the tides turn and the storm of a recession is heading to shore, you’ll get swept up in the deluge. Build your ship now and you’ll sail through it with minimal damage.
Clear the decks of debt
When the economy is strong, people feel safe taking on some debt. They might upgrade a bigger house, invest in a nicer car, or just indulge in the niceties of life. While that might be acceptable for those of us to have cash to spare, at least 40% of Americans aren’t financially prepared for an emergency expense of just $400 and many more are living close to the edge. One major life event could catapult most Americans into debt. This lack of financial preparation is a recipe for disaster in a recession.
To survive a recession with minimal damage, the first thing to prioritize is clearing out debt (especially unsecured accounts). Resist the temptation to buy bigger, better, and more. If a recession comes and you’re buried in debt, you could lose those items anyway. Instead, give your money a worthy purpose. Pay down your high-rate accounts and work your way down. Whether a recession hits in one year or five, if you aren’t prepared you could spend the next decade of your life trying to recover.
Create an emergency fund
As mentioned earlier, a scary low number of Americans can’t handle even a $400 unexpected expense. Everyone needs an emergency fund. Just consider the name, no one is immune to unexpected life events like job loss, natural disaster or family death. This savings should be enough to keep you afloat for at least three, but ideally six, months of difficult times.
This fund is even more critical during a recession when prices can rise, values fall and accessing liquidity (whether in your assets or through credit) can be much more difficult to access.
At first thought, putting away even three months of savings can sound daunting. If you focus on the magnitude of the challenge, you may count it out as impossible and ignore this necessity altogether. Instead of worrying about the final amount, break it down into small goals and set a regular schedule to set aside some cash. That could be once a week or once a month. If you skip a few of the small luxuries, there’s a good chance you can start setting aside $50 a week without feeling it too much. That being said, you’ll definitely notice a difference at the end of the year when you have $2,600 in your emergency fund.
Adopt a more frugal lifestyle
If you read our article last week, you’ll already know some of our tips for living beneath your means. Make it a habit to live on less than you have. This can benefit you in two major ways:
1. If a recession hits and you have to downsize, it won’t be any skin off your back. You’ll already be practicing that lifestyle.
2. While the economy is good, you’ll have extra cash you can stash away for a rainy day.
A great way to start practicing frugal spending habits is to take a step back and look at the big picture for your life. Have your financial choices aligned with your vision and priorities? Is your goal to have the nicest car or live the happiest life possible? To have the biggest house or to support and love your family to the fullest? You’ll notice these goals have two big differences, one requires money (and likely debt) the other requires just your presence and engagement. Stop prioritizing the wrong things and you’ll find it much easier to adopt a frugal lifestyle. This is only one of the many ways you can live beneath your means, check out this article for more inspiration.
Reassess your risk
A diversified portfolio can be your best friend in times of economic prosperity and downturns. In fact, it can be the difference of getting lost in the storm or riding the wave. If you have all your bets on one investment you automatically lower your likelihood of success. A well diversified portfolio with a range of investments across multiple markets can survive change because one win can offset another’s loss.
Remember, it’s been 10 years since the last recession. You’re not in the same place as last time. Likely, there is more risk to you if you don’t fare this recession well. When this one eventually hits you don’t want your savings parked in risky investments. Furthermore, recession or not it’s a good idea to diversify your investment with a balance of safe and more aggressive assets.
Consider different income streams
Different income streams could take the form of a weekend job, renting out the extra room in your home, or turning your talents into revenue sources. For example, if you’re a strong writer you might consider writing blogs for businesses. Check out websites like Fiverr to explore the limitless freelance opportunities. All of the income you realize from this secondary source can go straight into your emergency fund and you can start resting easy knowing you’ve done your best to be prepared.
When everything is said and done the two most important things to prepare for a recession are to ensure you have a strong cash reserve and reduce your outgoing expenses. Make like a boy scout. Be prepared and all will be well.