How To Financially Prepare Yourself In A Recession

Inflation and recession are two of the most feared words in the English language. They have the ability to strike fear into the hearts of even the most astute investors. 

An economic recession is a period of time when the economy contracts and overall economic activity slows down. A recession is typically characterized by high unemployment, lower consumer spending, and decreased business investment. 

Inflation, on the other hand, is an increase in the price of goods and services. For example, gas prices have reached $5 a gallon.

While a recession can be difficult to predict, there are certain things you can do to financially prepare yourself in the event that one does occur. 

Here are a few tips:

1. Diversify Your Income Streams

One of the best ways to protect yourself during a recession is to diversify your income streams. If you rely on one source of income, such as a full-time job, you are more vulnerable to the effects of a recession. If you have multiple sources of income, such as a part-time job, freelance work, and investments, you will be in a better position to weather the storm.

2. Downsize to a More Frugal Lifestyle

Your lifestyle determines how much money you need to live. If you live a frugal lifestyle, you will need less money than someone who lives a more luxurious lifestyle. 

During a recession, it is important to downsize your lifestyle in order to make ends meet. You may not be able to afford that new car or fancy vacation, but you can still live a comfortable life.

For example, reduce the frequency of going out to eat by cooking at home more. You can save a significant amount of money by doing this. Additionally, you can also choose to reduce your housing expenses by downsizing to a smaller home or apartment.

3. Be Real About Risk Tolerance

When it comes to investing, risk and reward are directly linked. The higher the risk, the higher the potential reward – but also the greater the potential loss. 

During a recession, it is important to be realistic about your risk tolerance. If you are not comfortable with losing money, then you should not invest in high-risk investments.

However, if you are willing to take on more risk, you may be able to find some great opportunities during a recession. For example, buying a property during a recession can be a great investment if you are able to hold onto it for the long term.

4. Keep Your Credit Score High

Your credit score is important for two reasons. First, it allows you to get better interest rates on loans and credit cards. Second, it can help you weather a recession by giving you access to lines of credit. If your credit score is high, you will be in a better position to get approved for a loan or line of credit during a recession.

5. Don’t be Afraid of a Bear Market

A bear market is defined as a 20% decline in stock prices from their peak. While this may seem like a large drop, it’s important to remember that the stock market is a long-term investment. Over time, it has always recovered and gone on to new highs.

If you’re retired or close to retirement, you may be wondering if you should sell all of your stocks and move to cash. While it’s important to have a diversified portfolio, selling everything and moving to cash is probably not the best idea.

During a bear market, it’s recommended to stay calm and stick to your investment plan. Remember, the stock market will recover and if you sell now, you’ll just be locking in your losses.

6. Don’t Try to Estimate the Market Bottom

Many people want to sell stocks at a higher price and then buy them again at the bottom, but this is extremely difficult to do. If you try to time the market, chances are you’ll end up losing money.

The best thing to do during a bear market is to ride it out and stay invested. Over time, the market will recover and you’ll be glad you didn’t sell.

7. Diversify Your Investments

When it comes to investing, diversification is key. By diversifying your investments, you are spreading out your risk and giving yourself a better chance to succeed. During a bear market, stocks will go down but not every asset class will decline at the same time.

By diversifying your portfolio, you can diversify big losses from a bear market in a short time. If you’re a long term investor, you can afford to weather the storm and come out ahead in the end.

8. Recession-Proof Your Career

If you want to be prepared for a recession, it’s important to have a career that is recession-proof. There are certain industries and jobs that tend to do well during a recession. For example, jobs in healthcare and technology are typically recession-resistant.

Also, it’s nice to have a job that is in high demand. If you have a skill that is in high demand, you will be less likely to lose your job during a recession.

9. Have an Emergency Fund

In any economic condition, having an emergency fund is essential, but a recession makes it much more crucial. This is money that you set aside to cover unforeseen costs like lost wages, medical expenses, or auto repairs.

Ideally, you should have enough money in your emergency fund to cover three to six months of living expenses. If you don’t have an emergency fund, you can begin by setting aside $50 from each paycheck until you reach your goal.

10. Create a Budget

If you don’t have a budget, now is the time to create one. Review your expenses and make cuts where necessary. A budget will help you track your spending and ensure that you’re not overspending. During a recession, it’s especially important to stick to your budget.

11. Pay Down Debt

If you have any high-interest debt, such as credit card debt, now is the time to start paying it off. Not only will this reduce your monthly expenses, but it will also free up more cash flow to help you weather a recession.

Final Thought

No one can predict the future, hope you can help protect yourself and your family from the potential financial hardships that may lie ahead.