You don’t have to be an Ivy League analyst to realize that the economy is going through some serious ups and downs at the moment.
In fact, you can see that:
- Stocks are volatile
- Interest rates are rising
- National debt is increasing
And you can also feel a sense of uncertainty in the air.
So if you’re worried about the next recession and want to learn how to best prepare for it, then you’ve come to the right place.
In this article
Let’s get into it.
What is a Recession?
A recession is a temporary period of decline in the stock markets and economy that can last for months or years.
Additional indicators that could suggest you’re in a recession include:
- Rising unemployment
- Decreasing stock prices
- Decreasing real estate value
- Decreasing consumer confidence
Consequently, a recession could seriously impact your personal finances.
That’s why it’s important to prepare for a recession today.
How Long Does a Recession Last?
According to the National Bureau of Economic Research, a recession typically lasts around 11 months.
However, recessions are not made equally.
Recessions can be:
- Long and mild
- Short and mild
- Long and severe
- Short and severe
What Happens During a Recession?
Basically, the economy takes a nosedive when you’re in a recession.
Here’s what you’ll see during a recession:
- Increased lay-offs
- Decrease in wages
- High unemployment
- Increased government debt
- Stocks and bonds fall in value
- Decrease in consumer spending
The Bottom Line:
When the economy recovers, the negative trends of the recession will also start to recover. You just have to focus on the long term.
How to Prepare for a Recession
Here are several ways to prepare for a recession.
Try to incorporate at least one or two strategies to stand the highest chance of financially surviving the economic storm.
1. Increase Your Emergency Savings
Before you even think about investing, first consider how much cash you have saved up.
So, if you spend about $3,000 per month on basic living expenses, including:
- Student loans
…Then your emergency savings fund should have between $9,000 to $18,000 saved in cash for emergencies.
Since the chances of being unemployed during a recession are far higher (and may take much longer than the average 7.7 weeks), you want to make sure you have enough money to hold you over a “dry spell” or no-income period.
Now, 3 to 6 months’ worth of living expenses is a lot of cash.
I have a trick to optimize your stashed cash to earn a little extra.
In the current economy, you probably can expect to see interest rates in high-yield savings accounts ranging between 0.50% to 0.60%.
The top high-yield savings account I would recommend for your emergency savings fund is Axos Bank.
Axos Bank is a high-yield savings account that offers competitive market interest rates (as of June, 2022 interest rates hover around 0.61% APY).
Here’s what you’ll need to open an account with Axos:
- $250 to start a savings account
And here’s why Axos Bank is pretty awesome:
- FDIC insurance
- No monthly fees
- 24/7 access to cash
- Competitive high-interest rates
- No minimum balance requirement
Get the biggest bang for your buck by investing your emergency cash in a high-yield savings account.
2. Pay Off High-Interest Debt
Debt can especially be a heavy burden during a recession, where fears of unemployment (and consequently no income) may be in the air.
If you carry high-interest debt, now is the time to get out of debt ASAP.
Below are some examples of high-interest debt:
- Payday loans
- Credit card debt
- Other personal loans
Basically, you’ll want to start paying off debt with interest rates of 10% or more as fast as possible.
If you need help paying off your credit card debt, then consider checking out Tally 👇
Tally pays off your credit card debt (even if you have multiple credit cards) and then Tally gives you 1 consolidated loan to pay.
When you pay off your debt, you have fewer payments due, which can help ease your mind, especially during a failing economy.
Once your debt is paid off, you can use your money to:
- Invest in the stock market
- Pay off other, lower interest debt
- Put toward your emergency savings
3. Stick to Your Budget
If you want to prepare for a recession, you have to learn to live within your means.
Here’s a simple formula for sticking to your budget:
In other words, your expenses must be less than your income.
One easy way to monitor your expenses is by creating a budget.
Sticking to your budget – and not spending more than you earn – is going to be SUPER helpful, especially when a recession is looming on the horizon.
By sticking to a budget and living frugally, you can actually free up a lot of your money to:
- Pay off debt
- Invest for retirement
- Use toward emergency savings
If you think you’ll need a little bit of guidance when it comes to budgeting, I would suggest checking out YNAB 👇
Here are a few of my favorite YNAB features:
- Easy to sync outside accounts
- Can directly import bank transactions
- Customized budgeting recommendations
- YNAB website offers excellent financial advice
YNABers typically save about $6,000 on average within the first year.
And you can also get a free 34-day trial to check out what YNAB is all about and whether the app fits your style.
If you need help getting your budget under control, this app is certainly worth checking out.
Recommended Reading: YNAB Review
4. Cut Down Expenses
As your income increases, it’s probably a good idea to check out where you can cut costs and save more money.
In addition to sticking to your budget, as discussed above, it’s also important to avoid allowing lifestyle creep to nibble away at your net worth.
Since the chances of your income being slashed or eliminated are pretty high during a recession, you want to make sure you can live without certain expenses.
That’s why it’s important to learn how to cut costs before a recession hits.
Below are some easy ways to cut costs fast:
- Cut the cord
- Find a roommate
- Go thrift shopping
- Terminate subscriptions
- Bargain with your utility companies
If you need help reducing your utility company payments, then you may want to check out Truebill 👇
Truebill can cut the following costs for you:
- TV bills
- Wifi bills
- Service bills
- Internet bills
The only time you pay is when Truebill successfully negotiates (and lowers) your bills for you.
5. Diversify Your Investments
Have you ever heard of the saying: “Never put all of your eggs in the same basket?”
Well, the same goes for your income streams.
Imagine depending on just 1 income stream during a recession… and then facing the reality of being let go from your company.
Without income, it’s going to be pretty hard paying for your regular living expenses – not to mention the difficulty of finding a job during tough economic times.
So, don’t rely on just your 9 to 5 job.
Below are some ideas to diversify your income streams:
6. Start a Side Hustle
If you’re serious about preparing for a recession, start building your side hustle as soon as possible.
So you can build up extra income before the economy turns sideways.
Here are a few side hustles and their monthly income potential:
- Blogging – $0 to $5,000+
- Email marketing – $0 to $,5000+
- Affiliate marketing – $0 to $10,000+
- Freelance writing – $1,000 to $5,000+
Now keep in mind, you probably won’t see numbers even close to the numbers above within the 1st, 2nd or likely even 3rd year of pursuing your side hustle.
But, if you are consistent, committed and stick with your plan then chances are, you’ll likely succeed.
Recommended Reading: Best Side Hustle Ideas
7. Continue Investing
Especially during a recession, you’ll want to continue with your regular investment plan.
This is how you’ll make the big bucks, if you keep investing during the downtimes.
This type of investment strategy is called the dollar cost averaging strategy.
Here’s how you can win with the DCA strategy:
- Focus on the long term
- Don’t sell during a recession
- Make consistent investments
In fact, you can win with consistently investing – especially during a recession.
Think about buying stocks like buying clothes:
- Do you want to buy on sale?
- Do you want to buy at full price?
Chances are, you’ll probably want to buy clothing on sale.
The same concept goes for stocks.
Stocks are cheap to buy in a recession.
The shaded, grey areas indicate a recession.
Now take a look at what follows a recession – a stock market increase.
In fact, the stock market performance after a recession generates, on average, a 339% return over a 6.6. year period.
You can’t win if you try to time the market (e.g. getting out of the market before it crashes and buying at all-time market lows).
Take a look at the chart below to see why timing the market doesn’t work:
Data Source: Adams Funds
As you can see, if you had stayed invested, at the end of these 13 years, you would have made an average annual return of 9.26% versus if you just missed the 2 best days of each year in the market, your returns would have been just 1.19%.
So how do you avoid timing the market?
By sticking to your dollar cost averaging strategy (DCA).
8. Live on 1 Income Stream
One of the best ways to prepare for a recession is if you and your partner live below your means by:
- Saving 1 income stream
- Living off of the other income stream
Living off of only 1 income stream can help you with the following:
- Pay off debt
- Save for retirement
- Keep investing during a recession
- Increase your emergency savings fund
This rule of thumb only works if you live with your partner and both of you are earning income.
The Bottom Line:
If you practice living off of only 1 income stream when times are good, it’s going to be very easy for you and your partner to live off of 1 income stream, should (worst case) 1 of you lose your jobs during a recession.
9. Invest in Yourself
One of the key outcomes of a recession is high unemployment.
And even though you may be completely crushed that you were let go of your job, you can actually use that opportunity to invest in yourself.
That’s of course assuming you have:
- Paid off your debt
- Additional income streams
- Bulked up your emergency fund
In fact, you can position yourself to be an extremely desirable employee if you continue developing your:
Remember that when you add value to the job market through an improved skill set or qualifications, money will typically follow.
Preparing for a Recession: FAQs
Below are some things you can do to optimize your wealth before a recession.
These steps include:
- Pay off high-interest debt
- Continue investing in your education
- Invest in reliable, stable and dividend producing stocks
- Build an emergency fund with 3 to 6 months’ of living expenses
And remember, as you move into a recession, a good money-making strategy is buying index funds (for example) when they are “on-sale” or when their prices are significantly lower.
If you’re already in a recession, then there are several steps you can take to maximize your financial picture.
Below are some steps you can take when you are in a recession:
- Pay off debt
- Invest what you can
- Decrease your expenses
- Maintain a long term vision
- Continue investing in yourself
- Increase your emergency savings
The key is to maintain a long-term vision – a recession is temporary (based on historical data) and chances are, the economy will recover even stronger than before the recession.
You can survive a recession if you prepare properly beforehand.
Some steps you can take include:
- Invest in yourself
- Stick to your budget
- Build passive income
- Live below your means
- Build an emergency fund
- Diversify your investments
Here’s what’s important: Don’t sell your investments out of fear when the markets are down.
Remember that what goes down, must come up (and vice versa, too).
Although none of us have a crystal ball to predict the future, it’s so important to have a game plan ready before a recession actually happens.
There is no need to worry about a recession if you have taken the steps above.
Instead, focus on things to thrive while the stock markets are tumbling lower:
- Invest in yourself
- Build passive income
- Invest when markets are low
One thing to keep in mind is this: Recessions are temporary.
Preparing for a recession today will help you stick through the storm tomorrow.
Your bank accounts will thank me later.
How do you plan to prepare for a recession? Let me know in the comments below!