A Recession is a period when an economy contracts for two consecutive quarters.
Economic Shocks trigger recessions in the system, such as the housing crisis – the Great Recession in 2008 that resulted from subprime mortgage loans and a decrease in home ownership.
Recessions have been documented since the 18th century but tend to strike every 10 to 15 years. Luckily, it’s possible to survive a recession without going bankrupt.
A recession or an economic downturn has severe implications on your financial well-being and plans; however, careful planning makes it an excellent opportunity for securing your financial security and can bounce back sooner rather than later.
Here are some practical tips to survive a recession and thrive when the economy recovers.
1. Stay informed and be a wise spender
The first rule of thumb to survive a recession is to stay informed. Regularly read up on economic indicators such as GDP (Gross Domestic Product) growth rate, inflation, money supply, and interest rates to keep yourself abreast of global uncertainty. This will help you understand how the economy works and how each sector is faring.
A recession is a period when interest rates are at their lowest. This means that the cost of borrowing money for homes, businesses, and investments is very low for the long term (as long as the recession lasts). This is an excellent time to invest in productive assets that generate passive income for years.
A wise spender knows how much they earn, how much they owe, and how much they can afford to spend. If you don’t have a budget, you should start one immediately. A budget is the only way to stay on track with your finances when the going gets tough. It will help you see where your money is going, set financial goals for the future, and avoid debt.
2. Keep your emergency fund intact.
An emergency fund is a savings account with enough cash to cover three to six months of living expenses. This covers unforeseen expenses such as property repairs, medical bills, and job loss. Let’s assume that you earn $4,000 per month. Your living expenses would be $2,000 per month, which leaves $2,000 for savings and debt repayment.
A recession will cause many businesses to cut back on hiring and spending. This may result in a decrease in your income. If you want to draw on your savings to survive, you should have enough money in your account to survive the difficult times.
To maintain the same standard of living, you would need $2,000 per month from your savings. This leaves you with three months of living expenses in your savings account, which is insufficient.
If a recession leads to a decline in income, you must draw on your emergency fund to stay afloat. A recession is an excellent time to replenish your emergency fund or start a new one using funds that would otherwise be put toward unnecessary expenses.
3. Don’t make rash financial decisions.
A recession is stressful, but it’s important not to make rash financial decisions. These include Investing in what you know – Investing in real estate, stocks, and bonds is a great way to make money, but you have to be careful. When the economy is booming, it could be easy to fall into the trap of investing in something you know nothing about, such as crypto or the stock market.
It may be tempting to jump into the latest high-risk investment, but you are much better off investing in low-risk investments than you understand. Going on a spending spree – A recession is not a good time to buy a new car, a house, or expensive luxury items.
It would be best if you only made essential purchases. Taking out a loan – You should avoid going deep into debt during a recession. Borrowing cash to buy expensive assets such as real estate or a car in these turbulent times is bad.
4. Pay down your existing debts.
A recession is a perfect time to pay your debts and avoid additional obligations. According to a survey, almost 50% of people expect to increase their debt during a recession. Don’t be one; pay down your debt and avoid new debt. Because interest rates are low, it’s a great time to refinance your mortgage and lower your monthly payments.
You can use your money to pay off high-interest debt, such as credit card bills, improving your credit score. Avoid taking on new debt by avoiding credit card offers.
If you’re a freelancer or self-employed, a recession is a great time to build up your savings. You can do this by reducing your monthly expenses and avoiding credit cards. Taking on a part-time job could help you boost your savings and avoid taking on debt.
5. Hold only the essentials.
During a recession, you should hold only the essentials. Are you one of the many people who have lost their jobs? There is no need to hold onto a second car or a house you cannot afford.
It’s better to downsize your lifestyle, reduce unnecessary expenses, and save as much as possible. If you have been laid off, consider downsizing to a smaller house to reduce costs. Consider living in a cheaper area or moving in with family to lower your housing costs.
You will find many ways to reduce expenses, but focusing on the essentials is the best. This can help you save money to get through a recession without going bankrupt.
6. Make the most of your job hunt.
An increase in the unemployment rate and pay cuts are a few immediate repercussions we witness during the rough patch. Some layoffs are inevitable in a recession. During the Great Recession, almost 2.1 million Americans were laid off in 2009 alone.
Still, companies that emerged better from the crisis relied less on layoffs to cut costs but hired skillful candidates for their operational improvements. Hence, a recession is a great time to start looking for new jobs or to change your career path. Learning new skills or technology in demand is a good idea that will keep you ahead of the competition.
Fewer people are looking for work, so employers will likely hire the best candidates. This is the perfect time to polish your resume, create a LinkedIn profile, and apply for jobs that fit your skills well. If you are new to the job market, you may consider retraining.
Many countries provide financial assistance for retraining employees. This can help you get the skills you need to secure a better job and increase your earnings. There are many ways to make the most of your job hunt, but the most important thing is to keep trying.
7. Sustainable Cash flow during the recession
Cash flow during a recession is more important than ever. When the economy is in a downturn, people are compelled to cut costs, daily expenses, and other essentials. This means they need to be prepared to pay their fees in cash.
If you cannot consistently generate enough cash flow to cover your business/personal expenses, you could be out of money before you know it.
If you have debt obligations like car loans or credit cards, ensure those balances are paid monthly. If not, put a small effort into paying as much as the remaining balance on each card until the balance is zero.
To help ensure that you have the funds necessary for your business’s survival or your household expenses and bills during a recession, it’s essential to establish a plan for generating sustainable cash flow.
Start by creating a budget and determining how much money you bring each month. Then, identify ways to reduce your expenses so you have more monthly money.
Finally, determine how long it will take to bring in the amount of money you need each month and make sure you plan how to use it once it arrives.
8. Diversify your portfolio
Diversifying your investment portfolio is one of the best ways to minimize risk during the bad times of a recession. Investors who own a diverse portfolio of different stocks, bonds, and other investments are less likely to see their portfolios decline during an economic downturn.
A diversified portfolio comprises individual holdings from multiple sectors – such as large-cap stocks, small-cap stocks, or foreign stocks – proportionally to the portfolio’s overall value.
Taking the right investment decision of diversification across various sectors reduces the chances of experiencing significant losses if one sector experiences a sudden decrease in value. For example, suppose you invested money in just one market sector, such as utility stocks, during the Great Recession. In that case, you could have lost significant money if that sector had declined sharply.
Instead, if you had a balanced portfolio that included a mix of different stocks and bonds, you would likely still have some money left over even if utility stocks took a hit.
9. Invest in yourself
When times are tough, people must cut back on their spending. While being mindful of your finances is essential, you should never stop investing in yourself. This can help you prepare for any financial challenges that may arise in the future. Plus, it will help keep your skills fresh and up-to-date.
More importantly, it will be valuable in a time of economic uncertainty. When the economy is in a downturn, you can often expect a decreased demand for your services. This could mean fewer opportunities for you to find work and make money.
During this type of situation, it’s essential to invest in yourself. Doing so will give you an advantage when competing for new projects and clients. It will also help you stay on top of your game when times get tough. By starting early, however, you can lessen a poor economy’s impact on your life.
10. Start a hustle today, not tomorrow
The Great Recession has been a reality for many Americans for a decade. While some may have had access to affordable mortgages and 401(k)s in previous decades, those who entered the workforce during the recession did not have similar advantages.
The result is that more Americans are struggling to make ends meet while searching for jobs in an increasingly complex economy.
There are many reasons Americans find it harder to succeed in today’s economy, but one of the most pronounced is the lack of available jobs. As unemployment rates climb higher and higher, it becomes harder and harder for people who want to work full-time to find employment.
Without a stable income, saving money or building credit is complex, making it even more difficult for those who want to start a side hustle.
The good news is that starting a side hustle doesn’t need to be expensive or time-consuming. There are plenty of ways to start earning money on the side without investing any money.
You might be able to work as a babysitter, deliver food for extra cash on the side, or set up an online shop on Shopify or Etsy if you have a particular talent that could generate sales. By starting a side hustle, you can ensure you have enough money to cover basic expenses and keep your head above water.
A recession can be a stressful time for both businesses and individuals. It’s essential to stay informed, keep emergency savings untouched, keep your spending and debt levels low, and make the most of job opportunities.
A recession is an excellent time to reevaluate your investment strategy to make you less vulnerable to potential recession. You can also use this time to invest in yourself by setting new goals and learning new skills. You will be in a better position to thrive when the economy recovers.