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How to Prepare Yourself for a Recession

You will inevitably experience a recession at some point in your life. Knowing what to expect and how to prepare will make the experience less stressful for you and your family. A recession is temporary. Remembering that will help you remain optimistic that things will eventually turn around for you.

What is Recession?

Simply put, the recession is a stage in the economic cycle where there is a dip in economic activity. It generally follows a period of growth or ‘boom.’ A recession is categorized in different ways but is generally identified by a widespread drop in spending. In some recessions, supply outweighs the demand leading to several adverse consequences. Inflation can be a cause of a market slowdown as well.  Recession can cause job losses, defaults on student loans and mortgages, hike in interest rates, and volatility in the stock market. All of which can have a profound impact on a person’s mental health as well as their finances.

How is Recession different from Depression?

When a recession drags on for a long period and turns severe, the economy is considered to be in depression. A recession is a normal part of a business cycle. However, depression is not. They are much more devastating in scale and impact. While recession can last for months, depression can last for several years. Economies only need to make minor market corrections to recover from a recession. But recovering from depression often requires drastic economic measures and significant policy shifts.

Early steps to take to prepare for a recession

Some people get nervous when the economy is doing well for long periods. Some even expect the “shoe to drop” and the recession to set in. They keep their affairs in order so that they will be positioned to survive whatever the economy does.  Some early steps to take may include the following:

1.  Reduce or eliminate your debt.

Some debt, like mortgages and car loans, are long-term.  But other debt, like credit card debt, can be reduced when hard times are expected.  There are many ways to do this. One effective way is to work on paying off the smallest balance first and then using the money that used to be paid on that debt to pay off the next smallest balance. For some people, being able to cross off debt from a substantial list is energizing. Others prefer to pay off the credit card with the highest interest rate first. This saves more money in the long run. Whatever you choose to do, have a plan. Talk to your financial advisor or find one of many books in your local library that will give you tips on how to pay down debt.

2.  Establish an emergency fund.

Set up an emergency fund that would cover roughly six months of expenses.  This has become more critical in light of the recent pandemic. If you live paycheck to paycheck, you will need to find additional ways to earn money.  Here are a few:

  • Go through your closets and cabinets to find items you no longer need.  Have a yard sale or garage sale.
  • Ask your boss for a raise and advocate for yourself at work.  Prepare a list of all your contributions to the company in the previous year. 
  • If you live solo and have rooms to spare, then get a roommate or more than one roommate. You can check college bulletin boards or online forums. Ask friends or members of your church. Carefully vet anyone you are thinking of letting into your home.

3.  Find ways to save money. 

When a recession is just around the corner, it’s time to tighten your belt!  Think through all of your current bills. Call every vendor to see where you can save money.  Do you really need 200 channels on your television?  Check out streaming services. Call your cable provider. Call your cell phone provider. In every case, tell them that you must cut costs and ask for suggestions. Be sure to mention that you will be checking with their competitors and plan to take advantage of the best plans.

If you eat lunch out often, change that to preparing your lunches. If you buy expensive brand-name grocery items, try the store brands.  Many store brands are made by the same manufacturers as the more expensive labels. You may not notice any difference in quality. Take advantage of coupons, store loyalty programs, and plan meals around the weekly specials. Cancel magazine subscriptions, streaming services that you don’t use, and anything else that is non-essential. If you and your friends give each other birthday presents, get together with them to discuss an alternate plan like perhaps going out for ice cream for each birthday. 

If you still send birthday cards, start buying them at a dollar store. Many dollar stores carry well-known brands of cards for rock-bottom prices. They also carry low-cost wrapping paper and gift bags, cosmetics, kitchen items, cleaners, personal care items, and many more things.

4.  Save on gas.

Plan your trips carefully so that you can take care of many chores in one trip.  Check Gas Buddy or a similar app to find where gas prices are the cheapest. Keep your tires properly inflated at all times. Don’t carry heavy loads in your car for days. Get together with a friend or neighbor to go grocery shopping together. You can drive one time, and they can drive the next. Use the pharmacy inside your grocery store, if it is a preferred provider, instead of going to a different pharmacy in another location.

5.  Evaluate your investments. 

A recession might not be the best time to invest heavily in the stock market. Be sure that your emergency fund is easily accessible. Keep an eye on online high-yield savings accounts, which often pay more than local brick and mortar banks and credit unions. Consider consulting a fee-only financial expert to see what recommendations they might have, especially one who is a fiduciary and a Certified Financial Planner (™).  Evaluate the fees on any 401(k) or IRA accounts that you have now. Maintaining your monthly or annual contributions to these accounts is also a good idea. Talk to a tax professional to see if transferring any IRA funds to a Roth IRA instead so that when you retire, your income will not be taxable to you. A recession would hurt even more in retirement if you’re unprepared, so it is vital to be able to look down the road and plan for the future.

All said and done

While these steps can be helpful when dealing with the realities of a recession, they are also useful in our everyday lives.  Why spend money on monthly bills that aren’t needed or wanted.  We get by doing it because we can absorb the cost.  With economic and financial stressors, these moves become more critical for long term success.  It’s important to stay focused and know that you can get through the tough times.

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