How to prepare for a recession

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With the talk of an impending recession on the horizon, many are beginning to ask the question “what can I do now to prepare?”  Various indicators in the economy are pointing to the signs that an inevitable recession is coming which has been at the center of financial news for over the last few months.  As a result of this, there’s been a spike in recession fears throughout the nation and the question is being asked, “Is there anything you can begin to practically do now to prepare?”

In this article, we’re going to cover 2 aspects of finances that are equally important for preparing for a recession.  I like to approach this subject from a position of defense and offense, from protecting to being aggressive, which I’ll detail a little more.  Let’s start with what I would consider approaching finances from a position of defense…getting your finances in order allowing you to more effectively protect them from the coming storm.

Going on the defense with finances

One of the best ways to prepare for a looming recession is to make sure that your finances are healthy and in order.  This means that you should not be living paycheck to paycheck or burying yourself in debt, which could result in a financial disaster should the country enter into a recession and your job becomes a casualty.  Here’s what you can do now to help improve your finances and avoid a financial disaster: 

  1. Build an emergency fund – The first and most important thing you need to do is to build an emergency fund as it ensures that you’ll have access to money in case you lose your job during a recession.  Most financial advisors recommend that you have at least a minimum 3 months saved up to cover basic expenses, but realistically a 6 months savings is preferred.  While this may sound difficult, remember, this would be a bare bones budget, cutting everything out that’s possible and keeping the main things you’d need to survive: food, rent, healthcare, etc.  While you’d have to trim your budget back, it would be possible. Here are some reminders for building your emergency fund:
    1. Your emergency fund is different from your savings or investment funds. This fund is only intended to be used for emergency purposes, so make sure they are placed in an account separate from your investments.  This will be an account you can access easily. You don’t want to put this money in an account that is tied up with penalty fees to remove money like a CD, but rather just a plain old boring savings account like the kind you can get at your local bank.
    2. Be sure to accurately measure what your expenses will be in case you lose your job. You will likely remove certain expenses from your budget when you’re laid off, so it’s important that you take this into account to have a realistic and accurate figure for your emergency fund.
  2. Get out of debt – The next thing you need to do to prepare for a recession is to get out of debt.  Debt, especially the ones with high-interest rates like credit cards, eat up a huge chunk of your budget.  Without debt, your monthly expenses will be reduced and you’ll have more money to use in saving for your emergency fund to prepare for unexpected events that may come up.  Here are some tips to help you:
    1. If paying off all your debts is not possible, start with the smallest debt first.  This is an old trick I learned years ago from reading Dave Ramsey’s book, Financial Peace.  Once you pay off your smallest debt, it serves 2 purposes: you’ll get an emotional and psychological boost that you have paid off a debt which will translate into momentum and excitement for paying off your other debts.  The monthly fee you were paying for that smallest debt can then be rolled into your 2nd smallest debt. Use this same approach to pay off this debt and continue rolling the monthly money you’ve saved into the other debts.  In the book, this approach is called the debt snowball. I used this approach years ago when newly married and it made a huge difference setting my family on a path to financial freedom.
    2. Once you go down this path, do all you can to avoid any new debts.  Get creative and get aggressive. You’ll find there’s a certain energy and excitement that comes from getting out of debt which makes staying out of debt all the easier.  Remember your goals and keep those at the forefront of your mind. If something can put you back or deeper in debt, kick it to the curve. 
  3. Avoid using credit cards – Credit cards are a double-edged sword.  On one hand, they provide you with the ability to purchase something that you can pay for in installments or at a later date which also allows you to keep your cash.  But on the other hand, they have high-interest rates and this can tie up a big portion of your budget, especially if you plan on paying only the minimum amount each month.  Remember, the borrower is the slave to the lender. While I use credit cards quite frequently, I pay them off on a weekly basis and do not carry a balance.

Increasing your value and income

Earlier we covered steps that serve to act as a defense to ensure you’ve got an emergency fund and you’re getting rid of debt.  But one thing many overlook is not only to conserve your money but the other approach, and equally as important, is get aggressive to build wealth and income.  If I had any complaint about the Suze Orman and Dave Ramsey financial advisors of the world is that they focus heavily on not spending money. This is a valuable lesson for sure if finances are tight, but one thing many people do not consider is going on the offense and building wealth.  I believe that preparing for a recession should not only be focused on cutting down debt and saving money but you should also try to find ways to maximize your potential and increase your income, which can help you survive in a recession even more. 

  1. Maximize Your Professional Value – The best way to improve your income and also to make yourself recession-proof is to maximize your professional value. When companies were downsizing during the Great Recession, the first to go were the non-essential employees.  Essential employees add value to a company while non-essential employees typically ride the clock, do not work on improving their skills, and bring no value to the company.  So by adding skills to your resume, this is one proactive step you can take now to help make yourself indispensable to your company. It shows that you are proactive in your development and are not afraid to learn new things or take on new challenges.  Even if your current company doesn’t value the professional developments you are gaining, rest assured that someone within your industry is noticing it. Here are some tips to help:
    1. Learn a new skill or technology that is relevant to your profession or field. Make sure that you are able to properly utilize this new skill or technology for the benefit of your company.
    2. You can also attend training or seminars that offer certification.  Not only will this allow you to learn new skills and knowledge, but you can also use it to network with the right people within your industry.
    3. Don’t shy away from new responsibilities, tasks, or projects given to you. Companies give more value to employees who are not afraid to take on new responsibilities and challenges.
    4. Don’t hesitate to change jobs if there’s a good opportunity waiting for you. Remember it’s easier to change companies or industries when the economy is doing well.  Once the country enters into a recession, jobs will be hard to come by.
    5. I can not stress these points enough.  I own a business employing several people and I’ve had my fair share of team members who did the bare minimum, never wanted to be challenged, and were difficult to work with.  But on the other hand, I’ve had plenty of great team members which have been proactive in developing their skills, will rise to the occasion to learn something new, and just had a great work ethic.  These are the ones I reward and if times get hard, I’ll find a way to keep them on because I know they’re valuable and wouldn’t want to lose them. While I’ve never had to scale back my company, I do think about the implications of a potential recession and the impact it may have on my company.  As you can imagine, when I consider who I may have to let go, I can assure you that it is not the team members who are proactive in developing their skills. These are normally your best and most valuable employees.
  2. Have A Side Gig – Losing a job is painful, regardless if you are prepared for it or not.  Just the experience of being told that you’re going to be laid off can be disheartening and this is a common occurrence during a recession because companies are looking for ways to cut down their costs.  Though having an emergency fund can help you stay afloat while you look for the next job, another way to ensure that you’ll have income is by having a side gig. The beauty of our world today is that the side gig economy is growing. There are now numerous opportunities available for you to earn extra income without letting go of your regular job.  Developing these side jobs really comes down to being creative and thinking outside of the box. Here are some opportunities that you can look into:
    1. One of the more common and popular side gigs you can do is to become a Lyft or Uber driver. You can do this after your or during the weekends when you are not working.  If you have to commute long distances for work, consider offering this service by driving people from the city you’re leaving to your own city.
    2. If you are planning to travel for the weekend, you can rent out your apartment and earn extra cash.  Airbnb is a great site to advertise the property that you are planning to rent out.
    3. You can also start an ecommerce business selling stuff online through Amazon or eBay.
    4. If you possess certain skills like graphic designing, writing, video editing, copywriting, etc, you can also do freelancing work to make extra money. Craigslist is a good site to advertise your skills under the gig section.  You can also post what you can do on Fiverr, where you get to earn $5 when someone hires you to complete a task. I actually started my web development agency using Craigslist back in 2005. I would do simple websites for much lower than market prices.  I learned a skill and was paid at the same time. As my skills increased, so would my rate. Over time I was able to develop it into a full-time business.
    5. Network marketing is another side gig that has the potential to provide a good income. You just need to be good at selling and motivating people to sell as well.
    6. Starting a blog or YouTube channel is also a good side business.  Content is king and if you can speak to an audience with an authentic and authoritative voice, people will listen.  Find your passion and find ways to express it. Honestly, that’s how I built this channel. I got excited about prepping and I started uploading videos, and as they say, the rest is history.
  3. Adjust Your Investment Portfolio – Another thing that you need to prepare before the U.S. enters into a recession is your investment portfolio.  Many people who lost money during the recession was due to their investments suffering huge losses. So adjusting your portfolio to withstand the recession will help protect your wealth and ensure that your money is safe.
    1. 401k accounts were one of the biggest casualties during the Great Recession as it lost a total of $2.7 trillion in value by the first quarter of 2009 from its peak in the third quarter of 2007. The main reason for the loss of value was due to the stock market’s drop and signs are currently pointing that it will be again a casualty should the U.S. enter into a recession. Before that happens, you could adjust your 401k to focus more on safer assets like bonds to lessen the impact of the recession. This is also important if you’re already near retirement since a loss will be devastating for your retirement plans. If you’re still decades away from retiring, you can place them in safer assets during the recession and just bring it back to stocks when the economy is starting to recover.
    2. This financial advice goes the same if you are invested in mutual funds. You can adjust your investment to focus more on safer assets so it won’t get affected severely when a recession hits.
    3. Switching to precious metals is also a good strategy since these commodities tend to go up in prices during a recession.  Buying them when the economy is still good and the prices lower could set you up for a big payday once the recession hits.
    4. If you’re invested in real estate, you might want to sell them when the prices are still high, unless you are renting them out.  In the last recession, values of homes dropped and several owners were selling at a loss. On the other hand, during the recession is a great opportunity to buy real estate since prices are low.
    5. Be sure to review your assets and make sure you’re preparing them for what lies ahead.  If you have a financial manager, now is a good time to consult with them.

Conclusion

Signs are already pointing to the U.S. entering into a recession soon and experts are warning that it could be more severe than the Great Recession of 2007.  This is why it is important that you are prepared now to make sure that your wealth and income are protected when it does happen.

If you enjoy this article, please share on social media.  Please also share your feedback and other tips in the comment section below, as I learn a lot from the community. 

As always, stay safe out there.

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