A recession can be defined as an overall economic decline that lasts for several months to a few years. This kind of economic downturn can affect the entire world (called a global recession), only specific continents, or on a smaller scale nationally. A recession in any economy is inevitable, and as inflation—the fall or purchasing power—reaches new heights pre-COVID, you may be wondering how you can prepare to survive the next recession. Below is everything you need to know about surviving when a recession hits.
Downsize and Cut Spending
Cutting down on expenses and downsizing are two effective ways to get through a recession.
Downsizing is one of the most significant ways to save money on living expenses. This can mean moving into a smaller home, selling a second or third vehicle if it isn’t a necessity, or moving to an area with a lower cost of living.
If you cannot downsize, then taking action to cut costs and live simply is the next best thing you can do to save money. Living frugally doesn’t come naturally to everyone, but anyone can learn to do so with practice and the right alternatives. Prioritize mindful spending and focus on your necessities, to get through a recession without having a ton of financial difficulty.
Build a Savings Fund To Survive a Recession
Another thing you should focus on is building an adequate safety net. If you haven’t saved before a recession, you should put as much money as possible in your savings account. Having an emergency fund is essential even when the economy is great, and during an economic downturn will ensure that your household is recession-proof.
If an unexpected expense comes up, you can avoid going into debt and dip into your emergency savings fund instead. With the financial security of three to six months of savings, you can be prepared for things like layoffs and a rise in prices, which often occur during a recession. Here are some kinds of savings accounts that most people have:
Retirement Accounts Savings
Most Americans start saving for retirement in their 20s, but you begin at any age! Many people set up separate savings accounts for their retirement. If you have an employer, they may have a 401k plan. Once set up, a 401k allows employees to deposit funds which your employer will match up to a certain percentage.
An Emergency Fund
For most people, their basic savings account with their primary bank account will be their emergency fund. You want your emergency fund to be accessible, so keeping it in a standard or high yield savings may make the most sense.
Savings for Long Term Financial Goals
A few financial goals that people have is to retire at a certain age, purchase or pay off a home, or own a vacation home. For long-term goals savings options like high yield savings, bonds, or CDs could help you get a good return and ensure that you don’t use that money for other expenses.
Savings Accounts for Bucket List Items
Just because you are living through a recession doesn’t mean you have to give up life events or goals. And you can have some of your savings going towards these expenses. A few goals could be planning a wedding, traveling, or starting a family. A standard savings account, high yield, or even options like CDs or bonds can work for these goals.
Minimize Debt and Focus on Debt Repayments
If you have adequate savings and extra income to do so, you should try to pay off your debt. If you can only afford the minimum payment each month, avoid getting into more debt. With revolving credit accounts like credit cards, avoid discretionary spending and only use them for emergencies. Keep them at home if you cannot help yourself with credit cards.
If you need to take out a loan, be smart about it! When it comes to borrowing money, your credit score and the lender you work with will significantly impact the interest rates and repayment terms. And so, even with bad credit, you don’t have to go with high interest or high fee options like online payday loans. Instead, research alternative loans and different lenders in your area and online. With the right loan and lender, you can save a ton if you absolutely need to take on new debt.
Reevaluate Your Income and Career
Most people may think that it is risky to switch jobs during a recession and may want to sit tight with the career they have. However, that is not always the case. Depending on your industry and skills, a recession could be just as good as any other economic time to find a job with more pay. Do some research to see what the average person living in your city, with the same occupation makes. You can talk to your employer about a raise or consider switching jobs for higher pay.
You can also learn new skills through school or certifications to switch industries altogether to land a higher-paying job. Another option to consider, if you have the time, is taking on a second job. A second job can be as small as a side gig, to something bigger like an online business. Having any extra income will be helpful during a recession.
Diversify Your Investments
We have all heard the saying, “don’t put your eggs in one basket” it’s common sense with money, right? Kind of, when it comes to investments, many people don’t think it’s a bad idea to invest in one industry. Especially if it means paying lower prices to own or invest. In reality, investing is the best example of why diversification is so important.
Having a diverse investment portfolio can help protect your money when a recession hits and impacts certain assets or accounts. One example of this was the great recession of 2008, where home prices lost a ton of value. At that time, if all of your money was tied up in real estate, you would have lost a significant amount of it.
If a recession hits and impacts your investment account or assets, there isn’t much you can do. But if you still have investment money you can move around, definitely consider doing so. A financial advisor is someone who you can pay to find the best investments, so consider a professional if investing is new to you.
The Bottom Line With Surviving a Recession
A recession is inevitable in any economy and you’ll need to have an arsenal of financial strategies when trying to survive one. Downsizing, savings, minimizing debt, getting the most income possible, and diversifying your investments will help you get out of a recession with financial stability.