Recession! You have probably heard that word many times by now. And, it’s kinda buzzing nowadays due to the corona outbreak. This decline in businesses or economies happening today is pointing towards the upcoming global recession. In other words, it means an industry generating a few products for around 6 months, and connected organizations are losing money. The signs of recession for a common man come up in the form of the excessive unemployment rate, decreased home prices, stagnant salaries, and decline in the stock market as well as other investments.
Is a Recession Coming?
Economists in the world have been predicting a recession for a while now, and historically, a downturn comes in almost every ten years. This time, due to the outbreak of the virus, the global stock market has dived with experts pointing to a stronger recession in the US as well as the world. As per the latest economic news, financial experts warned of a plunge in the stock market and that it will serve as a mark of the long-term next global recession.
Economic depression is a critical downturn in an economy’s activities that stays for a long time. And, generally, it is defined as the one that lasts for 3 or more years, causing a decline in the GDP (gross domestic product) of a minimum of 10%. The following points are used to describe it.
- Huge unemployment rate
- A smaller amount of credit availability
- Low inflation/deflation
- A fall in the stock market
- Companies, governments, and individuals defaulting on credits
- Rich people start money saving efforts
How to Prepare for a Recession?
Economic depression or recession is not new. People have been surviving recessions since the beginning of mankind when ancestors faced famines and droughts. And, if you are worried about how to prepare for the 2020 recession, the following steps can help you and your family.
- Clear Your Debts
List down all the debts that you are yet to pay. Yes, those can make a crucial difference when it comes to the recession. You should pay down all those high-cost ones, particularly the dues on your credit card. And with recession down the line, if you are anxious about your job security, paying off the obligations will give you peace of mind.
If you have multiple loans, you should prioritize them properly. The debt on your credit card should be your top priority, followed by other loan types like auto or mortgages loan. Even if you don’t lose your job during the downturn, paying down your debts is a great practice for maintaining your finances. When you eliminate all the high-cost obligations, it helps you prepare for other expenses and financial matters. Moreover, having less debt allows you to put money aside, and you can use these lump-sum savings in the time of emergency.
- Increase Your Emergency Savings
Job loss is one of the bigger effects of the recession, making it hard for people even to meet their daily expenses. Investing an emergency fund is a good choice and becomes a cash pool that you save, particularly for the downturns. With this, you can afford all your essentials if and when emergency strikes. Even while paying off your debt, you must prioritize saving some funds for later use and stock up for at least a month. And then, you can pay off the debt, followed by a focus on creating savings for 3 to 6 months. Choosing a savings account with a higher interest rate can add more money to your kitty on the funds kept idle.
- Find a Method to Cut Back
Regular expenses come from things you buy (or invest in) every day, week, and/or month. List down all those and divide them into necessary and unnecessary ones. To start preparing for a financial emergency, you need to let go of the unnecessary spending. These could be monthly subscriptions, hangouts with friends, or others. If you can’t immediately put a stop on all these, you can start by reducing the amount you spend on those items.
- Plan With a Farsighted Vision
The next big worry after debt and savings during an economic downturn is the investments. Since the recession puts the market down on its knees, it creates a fear of losing all the invested earnings. However, when the stock market falls up to 30-40%, you can create daily contributions and distribute reinvestments to gain more benefit than loss. Thus, if you are retired or planning for retirement soon and want to know how to make money in the next recession, making certain withdrawals for the initial years could be helpful. However, changing your strategy over short-term fears may risk your financial security in the long term.
- Spend Within Your Reach
Experts recommend not to spend over 30% of the total monthly income on optional buys. It’s a great idea to create a monthly budget to make sure that you are spending Experts recommend not to spend over 30% of the total monthly income on optional buys. It’s a great idea to create a monthly budget to make sure that you are spending within your limits. Prioritize essential expenses like house rent, payment of car insurance, utilities, groceries, and eat to live higher. You can then decide a budget for vacations, dining out, and all other things that you consider optional (lifestyle or luxury) expenses.
- Calculate Risk Tolerance
Even after putting everything in place, it’s always a good idea to have your risk profile calculated with a financial adviser. The calculation covers various factors like your risk tolerance, appetite for risk, and how much you can afford to take a risk on. Another essential factor, risk suitability is calculated based on your plans of converting your investments into cash. If you are willing to modify your investment strategy, having this as a basis for your strategic planning will be helpful. And, for immediate expenses coming up, you need to go conservative with options like saving accounts of high-yield and CDs.
- Invest in Education and Improving Your Skills
If you are worried about how to prepare for a recession as a college student or skilled labor, building up your skill level is a great investment. During a recession, unemployment rates for people with at least a bachelor’s degree are lower as compared to those with lower education and/or skill levels. The significance of education is always something economists emphasize. Thus, even if you are not able to create your financial buffer, improving skills, and taking up training for the things with high employability potential is a crucial investment.
Predicting a recession can be difficult if we only consider cues that led to it in the past. Since economies are dramatically changing today, many new sources have added that may lead to a downturn. But, this time, economists have predicted the virus to be a cause of the downfall coming. And it’s gonna hurt more as people can’t do much to prepare for the financial crunch.
However, it’s a great idea to ensure that your financial portfolio is ready for the new trouble on the horizon. And, when things go down, you must ask yourself what you can do to put yourself in a stronger financial condition. You need to start with getting rid of the debts, building upon a monthly or weekly savings plan, and minimizing expenses as soon as possible to be ready for the worst. Hopefully, this article answers your queries around “how can I prepare for the next recession?”