What is a Recession and How Can I Prepare for One?
If you’ve been watching or reading the news, there’s a good chance you’ve heard the word “recession” tossed around by financial experts, political figures, news pundits and more. But what exactly is a recession?
What is a Recession?
According to the Oxford Dictionary, a recession is “a period of temporary economic decline during which trade and industrial activity are reduced, generally by a fall in GDP in two successive quarters.” Basically, it’s when the economy experiences a noticeable slump which could result in job loss, stagnant wages and fewer retail sales.
The good news is that recessions generally don’t last for more than a year. The bad news is that recessions are pretty difficult to predict. Since you never know for sure when a recession is just around the corner, it’s good to be prepared for the next one.
How can I Prepare?
It took, and is still taking, several years for millions of Americans to recover from the 2008 Recession when the housing market crashed. Many Baby Boomers lost thousands of dollars in investments like property and retirement funds while Millennials were just entering the work force or watching their parents struggle to make ends meet. To help yourself better prepare for the next recession, you can do the following:
Build Up an Emergency Fund
We’ve discussed in previous articles what an emergency fund is and how they’re crucial to your overall financial health. If you don’t have one yet, start building one now. It’s recommended that you have about six months’ worth of your income saved in an emergency fund to tide you over through emergencies like a broken water heater, a damaged vehicle or temporary unemployment. By having an emergency fund, you can properly cover these expenses, or even everyday expenses, during a recession.
Pay Off and Avoid Debt
When a recession hits, there is a good chance your budget will be tight for some time. While you’re trying to cover the cost of everyday expenses, the last thing you’ll want to worry about is having debt looming over your head. Make it a goal to pay off any existing debt, focusing first on high-interest debt, as soon as possible. Once that debt has been paid down, try to avoid taking on any unnecessary debt. If you find yourself in a financial bind, debt will only make it harder for you to get yourself back into good financial status.
Live Below Your Means
If you’re bringing in good money through a steady income, you may feel more comfortable with purchasing large ticket items or going out to eat every other night. It’s okay to do these things once in a while, but it’s not economical in the long run. Even if you know you can pay for your purchased items and dinners, your paycheck may not be as large or as reliable when a recession hits. Practice living below your means so that if you do experience a setback from a recession, you won’t have to completely alter your lifestyle.
Figure Out Which Costs You Can Cut Out
Along the same lines of living below your means, examine your monthly expenses and see which recurring items you could cut out if you absolutely had to. Maybe you attend fitness classes every week at a boutique fitness center. This is an item you could temporarily downgrade to a basic and cheaper gym membership until you can stabilize your finances. Could you live without a couple of your streaming or subscription services for a while? Those are items that you could cut out of your budget at least until you’ve gotten back on your feet.
Make Yourself a Star Employee
Depending on how bad the recession is, some companies may experience layoffs. Make yourself indispensable to your current employer. That way you have a better chance of being kept on even if your company has to start cutting out some jobs. Make sure you’re giving your best effort on your projects at work or offer to pick up extra shifts if you have the time. If you sense layoffs are on the horizon, start thinking of some examples of how you’ve been an asset to your company. It also doesn’t hurt to start thinking of ways you can use your skills or hobbies so you have something to fall back on in case you do lose your job.
Review Your Financial Portfolio or Speak with a Financial Consultant
Not 100% sure where your finances stand? It may be time to review your financial portfolio to get a clear picture of where your assets and investments lie. Once you have a good idea of how your finances are doing right now, you can start preparing for a rainy day in the future. We have a team of Financial Consultants who are happy to help you get started.
Recessions are a reality in any economy. They’re often unpredictable and may blow over before you even feel the effects of one. In any case, it’s still a good idea to prepare for a recession now so you’re confident in your finances and ready to weather any economic storm.