Recessions can have a significant impact on your everyday life and budget, but there are things you can do to prepare and save yourself from a financial crisis. All you have to do is to know the right ways to prepare for a recession.
Since the COVID-19 pandemic, the world economy has been declining toward a potential for a recession. Feeling anxious about your lifestyle, career, and budget is natural during these tough times.
However, practicing responsible money habits can help you be successful no matter what happens with the economy. You can take steps to prepare for any future financial opportunities or emergencies during this period.
So here’s a 2022 guide on how to prepare for, deal with, and beat the recession while maintaining your financial stability in the best way possible!
What is a recession?
Before we discuss how to prepare for a recession, let’s review what typically happens when one occurs. A recession is an economic downturn that results in increased unemployment and decreased trade and industrial activity.
A recession is typically a period of economic decline for six or more months. A country’s GDP declines for two consecutive quarters, which indicates slower or negative economic growth.
During this time, spending by households and businesses is usually reduced for two or more quarters, and the decrease in spending leads to widespread layoffs and rapidly increasing unemployment. These changes usually occur in a given country for months to a few years.
7 steps to help you prepare for a recession
As we currently are, the US and most countries worldwide are showing signs of an upcoming recession. One can hope it doesn’t happen, but it’s better to be prepared.
So here are 7 steps to ensure you get through the recession safe and sound:
1. Track your finance
If the economy is making you uncomfortable right now, the most important step you can take is to become familiar with your monthly budget. It is important to have enough money to last as long as possible in an emergency.
Knowing how much money is flowing out of your pocketbook and where it’s going can help you make informed decisions about dealing with unemployment or any other financial emergency. It’s also necessary to list your expenses to remind yourself about the important payments and how you can manage your cash flow in the long run.
2. Stick to your budget
A day-to-day spending style won’t work if you’re not making enough money to maintain throughout the month. Creating a monthly budget is key to staying within your means and avoiding overspending. When the economy is strong, developing a solid financial plan can help you weather tough times.
If you’re good at managing a budget, you can save fast on a low income. Not only will your spending habits be a game changer to saving money in advance, but they will also allow you to continue that trend into recession.
3. Limit your spending
When you understand how much you’re spending, look for ways to reduce your expenses. Most of the time, these are unnecessary purchases.
Try cutting back on the number of takeouts, reducing the number of streaming services you have, or refraining from making any major financial commitments you don’t immediately need, such as going on vacation or paying for a months-long membership. Try out the 50-20-30 budget rule to become a master of spending wisely.
4. Pay high-interest balances ASAP!
The first step for anyone with a credit card is to pay off their balances as soon as possible. Being in a position to eliminate such high-cost obligations can leave you financially better prepared for other things. The more you can save and reduce your debt, the more money you’ll have available in an emergency.
5. Save more in your emergency fund
An emergency fund should provide enough money to cover six months’ expenses for a secure financial future. You may feel overwhelmed when trying to make a small contribution to a cause, but don’t underestimate the impact a few small donations can have.
Regularly adding to a high-yield savings account can help build the savings habit. Better yet, automate your contributions so you can avail this fund at any given moment. If you haven’t already started an emergency fund, there’s no better time to start saving than now.
6. Plan your upcoming investments
A recession is often synonymous with a stock market crash, which has already occurred once in 2020. When times are tough, it can be hard for companies to find new employees, grow their businesses, or make new investments. Even worse, layoffs might start happening.
Changing your strategy during a recession would be the wrong thing to do. Even when the US economy is in the middle of a recession, investors can look forward to months, if not a whole year, in advance when things improve. So plan your investments wisely to make the most of them during the aftermath of a recession.
7. Build a source of passive income
Many employers need workers, even during a recession. Sectors like technology, transportation, warehousing, leisure and hospitality, education, health services, and government never shut down.
Even if you don’t need the money now, it may be a good time to get a second job or find work in the gig economy to boost your income and savings. Now is the time to set up sources for passive income or take on a side hustle to save more and have a backup plan.
Don’t stress – recessions don’t last forever!
Preparing your wallet for a downturn in good times can help alleviate the stress and worry associated with recessions. And don’t worry, even if economists can’t predict recessions, they know when the US economy is in the middle of a recession and how long it may take to recover.
Also, remind yourself that recessions don’t last forever. If you’re prepared beforehand, your days will pass by smoothly. Instead of getting anxious over the possibility of facing a financial crisis, we suggest you start implementing these steps first thing this day and stay ahead of the economy!