Banking and Finance

💪How to Prepare for a Recession?

July 27, 2021

As businesses begin to shut down and unemployment claims reach unprecedented levels, many people are rightfully worried about the inevitable economic downturn that the coronavirus crisis is going to cause.

Before diving into whether or not coronavirus will cause a recession, it’s important to understand that recessions are a natural part of the business cycle of economies. In fact, there have been 17 total recessions throughout US history, the worst of which has been the Great Depression in the 1930s.

So, recessions are inevitable. And, while it’s likely that the pandemic will cause the entire global economy to fall into a recession, it’s important to understand that we will all ultimately recover from it. Meanwhile, here’s how to prepare for a recession with tips and actions you can take to safeguard your finances and future-proof your savings.

What is a Recession?

Before diving into how to prepare for a recession it’s necessary to understand just what is a recession. Many people seem to have the misconception that a recession if solely dependent on the stock market and its performance. And, that’s simply not true.

To be considered in a recession, an economy must, generally speaking, go through two consecutive quarters of negative GDP growth. This is usually accompanied by a lack of consumer confidence, job loss, and weak production.

Because people experience job loss, they spend less, which leads to a further decline in economic activity throughout the country. As well, the government tends to fall further into debt as they scramble to pass bills and take out more money in an effort to stimulate the economy.

Will the Coronavirus Cause a US Recession?

Last week, Goldman Sachs moved from predicting a 5% Q2 drop in GDP to a 24% collapse. And, that’s just the beginning. Unlike the last recession America experienced, which was caused by systemic imbalance, the recession that coronavirus will cause is due to an economic shock.

On average, recessions last about 11 months, but some of the country’s most severe recessions, such as the Great Depression and the Great Recession of 2008 have lasted longer. And, again, they’re inevitable. So, don’t let this scare you. Instead, simply let it encourage you to always be thinking about your financial future.

How to Prepare for a Recession

As mentioned, we all know that recessions will eventually come, whether due to an imbalance in the economic system or an unforeseen event like a pandemic. So, whether you’re preparing now because you have to or simply want to safeguard your finances against the next recession, here’s what financial experts say to do.

Stay on Top of Debt

Financial experts note that staying on top of debt is just as important as bulking up your emergency fund. Learning how to invest your money is important, but it won’t mean anything if you have mounting debt behind you.

Try focusing on the smallest debt first and making a plan for the next three to six months. This includes budgeting with your current income as well as possibly planning for a future where you might be furloughed or experience unemployment. 

Try to pay off as much as possible before an economic downturn that way when things start to get worse for you and the economy, you don’t find yourself drowning in debt because you’ve slacked on payments.

Rework Your Budget

Don’t think you have enough money to cover your regular expenses plus your debt? It might be time to rework your budget. One of the easiest ways to do this, especially if you’re not particularly financially-minded and hip on all the money lingo (like cheese), is to follow the 50-30-20 rule.

Kimberly Palmer, a finance writer, told NPR that her family is allocating 50% of their current incomes to their necessities. “So that's, like, our mortgage and groceries,” Palmer said. “30% is for wants, and that's the restaurant spending or ordering takeout. And then 20% is debt payments and savings.”

Take a Look at Your Emergency Fund

This is something that you should constantly be evaluating. In terms of the size of your emergency fund, that number will vary depending on your lifestyle, monthly costs, income, and dependents. But, you should aim to always have at least three to six months' worth of expenses stashed away in a rainy day fund.

Use the 50-30-20 rule mentioned above to help you accomplish this and always be extremely honest with yourself about your true expenses. If you like to live a certain lifestyle, make sure you include that in your budget. For example, if you know you simply don’t want to have to forgo certain luxuries, work towards saving enough to where you won’t have to.

Don’t Touch Your Investments

Right before or during a recession, investors seem to panic and sell all of their assets. They’re worried that they’ll ultimately lose out by holding onto them during such an economically uncertain time period. Don’t do that!

Experts such as Ryan Marshall, a New Jersey-based certified financial planner, urge you to avoid touching your investments. Leave them alone. Marshall told CNBC that “If you truly have a diversified portfolio, some of your holdings should be doing better with this recent market downturn.” So, avoid the temptation to run out and make rash decisions with your investments.

Learn New Skills

As the unemployment rate soars, you’ll find that the job market will once again become a bit more competitive. There are countless more people who are going to be fighting for the same job, at least until the pandemic ends and companies open back up or until a recession is over.

Take the time, especially given the unique circumstances of the specific situation we’re in, to learn a new skill that will make you more competitive and profitable. If you have a job currently, ensure that you’re learning new skills that will allow you to keep your job and even thrive in it well throughout the entire recession.

Learn how to invest your money, download the best investment apps, and ensure your financial health is in tip-top shape.

Saving Through a Recession

Yes, it’s possible to save throughout a recession. All it requires is dedication and commitment to monitoring your finances in a way that makes sense for your income, expenses, and lifestyle. However, there are additional things you can do to boost your savings in a time like this.

One of the easiest things? Signing up for a Cheese debit card. You don’t have to anything aside from swiping it, spending, and earning cashback. It comes with zero banking fees, savings bonuses, and cashback. You can save without doing really anything, and that’s the kind of change you need right now. 

Click here to begin your journey towards earning extra money easily.

More articles about how to prepare for a recession:

5 Actionable Steps for How to Pay Off Debt During a Recession

Are 401K Investments Safe in a Recession?

Drawing On 2008: Which Stocks to Buy During a Recession

How to Protect Credit Health During a Recession?

Tips to Cultivate a Recession-Resistant Investment Plan