How to Prepare for a Recession: 6 Steps to Take Now
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Merely hearing the word “recession” causes most people to react with utter fear. I was a stockbroker during the Great Recession of 2008 and saw how dreadful it was for investors. Thanks to the novel coronavirus, you may want to know how to prepare for a recession.
Given the significant measures our government has taken, rapidly increasing unemployment, and shuttering businesses, a recession is imminent, if not already occurring.
The good news is recessions do not last forever. However, that does not always quell anxiety. Thankfully, there are things you can do now to better position your life and finances.
If you want to know how to survive a recession, this guide arms you with the steps necessary to weather the storm.
What is a Recession?
Over a decade has passed since the Great Recession of 2008. You may not remember what a recession is and its impacts.
It isn’t always easy to quantify what is a recession, but there is often one clear sign. A recession occurs when we see a shrinking or contracting in the economy.
According to the National Bureau of Economic Research (NEBR), a recession occurs when we have two or more consecutive quarters of negative growth in the country’s gross domestic product (GDP).
Put simply, GDP represents the total monetary value of all finished goods and services made within the country. In an economic recession, production and spending slow down.
This sounds complicated, but it’s rather simple. During a recession, the economy shrinks and causes many to feel uncertain, at best, about their finances.
How to Prepare for a Recession
We know that all periods of economic contraction have ended. They often result in a significant expansion in the economy.
Unfortunately, that doesn’t make living during the period any easier. It’s still difficult for most. Here’s what you can do to prepare for a recession so you can stand on both feet once it’s over.
1. Save as Much as You Can
The best way to recession-proof your finances is to save money. Emergency funds are a popular topic in the world of personal finance, especially as many can’t handle an emergency of $400.
Now is a time you must have money in savings. If you have no savings, start with a goal of $500, and once you reach it, increase it in $500 increments.
You likely won’t reach to recommend three to six months of expenses, but don’t let that hold you back.
While challenging to save during an economic collapse, you want to handle saving as if your life depends on it. If you still have a job, take a serious look at what you’re earning and how much of your paycheck you can save.
Find a high-yield savings account that has a low minimum deposit requirement and start putting money in it.
If you can’t find one with low enough minimums, CIT Bank is a suitable alternative.
The bank has a $100 minimum balance requirement and offers many of the same features you find at a local bank, but done entirely online.
2. Analyze Your Spending
If you want to know how to survive a recession financially, the next best action is to analyze your spending. You want to avoid big-ticket purchases, if at all possible, and focus spending on necessities.
Those necessities should include:
- Essential groceries
- Rent or mortgage
- Cell phone
Your situation may be different, but most things outside the above are not a necessity. If you feel you’re paying too much for a service, use Truebill to negotiate a lower price.
Take any savings you recoup and put it in your emergency fund.
Ultimately, you want to live on a budget. A budget helps you manage your money to ensure you don’t overspend.
If you’re new to budgeting, our guide on how to create a budget will assist you in starting.
3. Manage Your Debt
If you’re asking yourself, “What happens during a recession?”, one of the most significant challenges is that having debt makes life more difficult. During the Great Recession of 2008, I was on the other side of my debt journey.
As I was assisting clients, I was incredibly grateful I was debt-free. Debt causes enslavement. It restricts you from doing what you want in life.
Combine that with an economic recession, and it makes matters worse.
If you’ve not done so already, write out all of your debts. This will help you form an attack plan. Do you have credit card debt and are still working?
If so, consider transferring to a 0 percent balance transfer card to alleviate some stress. Have you lost hours at work or your job? Contact the lender to see how they can help.
If you can’t pay your bills this month, don’t avoid them, or the lender. Work with them as that will make them more willing to work with you.
For other things like auto loans or credit cards, contact your lender to see what’s available.
4. Continue Your Investing
When you see the stock market go on a wild ride, the last thing you may want to do is continue investing.
I get it. I saw thousands of investors struggle with the same issue in 2008 and 2009. However, if you’re able, you want to continue to invest in the stock market.
A shrewd investor sees that lower prices help you take advantage of deals if you invest during a recession. This allows you to dollar-cost average, essentially allowing you to invest in good companies for lower prices.
They also see that a long-term view is necessary for success. Staying out of the market, when you’re able to be in it, will result in a significant loss in returns. The Great Recession shows us this.
If you’re new to investing or fearful of navigating the market during tumultuous times, Betterment is a terrific platform to consider. Betterment helps manage your investments cheaply and assists you in formulating a plan.
*Related: Another option for investing during a recession is precious metals. You can buy fractional shares of physical gold bullion with Valuted.
5. Diversify Yourself
We have lost tens of millions of jobs over the past few months. It’s a truly horrible time in the workforce.
If you have lost your job, or fear a reduction or layoff, now is the time to diversify and invest in yourself. Doing so may be easier said than done, but those that diversify themselves are better able to weather the economic collapse.
Despite the high unemployment rate, not all employers stop hiring. Some may even expand.
If you’re still at work, volunteer to take on new responsibilities. Ask to job shadow in a different area. Devote some free time to learning a new skill.
You never know how that will help you in the future.
Are you currently out of work? Look for ways to bring in income by researching the best side hustle apps to earn money.
The moral is to not stay static. Look for ways to grow yourself professionally, as well as additional income streams.
Those who do that, and look for ways to make money in a recession, will be able to manage the effects of the crisis more effectively.
6. Reanalyze Your Housing
One final step to plan for a recession is to reanalyze your housing. Housing is often the largest expense for most. If you can save money in this area, it will help you immensely.
Here are a few ways to save on housing:
- Get a roommate if you don’t have one
- Ask your landlord if there’s a way to save on rent
- Refinance your mortgage
While the first two are easier, interest rates are currently low, so refinancing may get you the most savings. Ask your lender what rate you might receive for refinancing.
Like cutting your expenses, take any savings, and put it in your emergency fund.
One note on moving, lenders are usually more risk averse during a recession. They will likely have stricter requirements, and the market is liable to not be as liquid.
Keep this in mind as you consider a move.
How long does an economic recession last?
Each global recession is different. The recession of 2008 lasted for 18 months, and it took roughly four years for the Dow Jones Industrial Average to return to its pre-recession highs.
The NEBR reports the average recession lasts for 11 months. Again, each global economic recession varies.
Given the severity of the current pandemic and how quickly we shut things down will likely impact how long the current recession will last. However, any statement is speculation at best as no one can predict how long it will run.
Even during the worst periods of economic collapse, there were investing opportunities that had gains, and the stock market returned. That’s why having a long-term view of investing is so crucial during these times.
Again, each recession is different, but there are several hallmarks true in most periods of economic collapse. Here’s what typically happens in a recession:
- Spending by companies and consumers slows
- Banks and creditors loan less money and require stricter lending standards
- Hiring slows
- Stocks decline
- Layoffs occur, often en masse
As we have seen over the past few months, the effects of a recession are quite scary. People see their livelihoods lost, investment gains diminished, and a general sense of uncertainty.
However, as the economy begins to recover, the above situations start to change. While difficult to believe during times of restriction, it is possible to survive a recession, but it does take planning.
Recession vs. Depression
As you ask yourself, “Is a recession coming?”, you may see talk wondering if we’re going to enter an economic depression.
When you look at a recession vs. depression, there are several differences, the most important being that an economic depression is a period of sustained and severe downturn in our GDP.
The only depression our country has experienced was the Great Depression which began in 1929. There is no way to know currently if our current situation will develop into a depression.
The best thing you can do is recession-proof your finances now. Anything true of a recession is true of an economic depression. Thus, be pro-active now to shore up your finances.
There are few things you can control in life. Experiencing a global economic collapse is at the top of that list.
No one can tell you when the recession began, or when it will end. If they do, they’re not a person to trust.
Our economy has experienced numerous recessions in our brief history. We made it through each one, and each one brought growth on the other side.
Now is the time to be vigilant with your finances. You want to streamline them and save as much as possible. We will return to a new normal, but things will improve.
It’s those with a long-term view of their finances that will effectively weather the storm.
What are you doing to prepare for a recession? How much are you able to save each month? What’s one area you’re struggling with and want to improve?
John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.
Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.
Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.