Are you ready for the next recession?

Recession warnings are coming from different directions. Banks, stock markets, TV stations, economists, and financial experts are all predicting a potential recession in the next 12 to 18 months.

However, the truth is, no one really knows when the next recession will arrive, and until it kicks in, all the predictions are just speculations.

With that in mind, let’s briefly look at what happens during a recession. 

What is a recession, and what are its effects? 

A recession is the decline of the economy. This decline lasts for at least six months or two consecutive quarters. 

According to the National Bureau of Economic Research (NBER), the effects of a recession are usually apparent in the GDP, income, employment, industrial production, and wholesale-retail sales. GDP declines, household income falls, unemployment rises, businesses are affected, and homes are lost.

The most recent recession was The Great Recession, which was the worst since the Great Depression. It ended about ten years ago.

Brace yourself for the next recession

From a recent survey by GoBankingRates, two-thirds of Americans are unprepared for a recession.

So are you in the same boat? Below are steps you can take to get ready financially for an economic decline.

How to Prepare for a Recession

Most millennials and Gen Z have never experienced a recession. It’s a scary thought. Maybe you’re wondering how you can protect yourself and your family against potential consequences.

Here’s what you should do:

  1. Start building a reserve of cash

You should always have emergency money whether or not there will be a recession. This money comes in handy when you have a significant financial obligation, such as medical bills.

In general, it is recommended that you have money equal to six months of your expenses in a savings account. Essential expenses include things like housing and utilities, necessary expenses such as food and personal care, and other financial obligations such as car payments, insurance payments, and medication.

Additionally, it will protect you from debt.

Slash your expenses

To top up that emergency fund, you need to cut down on expenses. For instance, eat out less, shop in thrift shops (sometimes), cycle or walk to work, ask for better deals, delay buying a car, etc. You can also eliminate luxury expenses, such as vacation.

Slashing expenses will free up some money to be used in the future.

Pay high-interest debt

High-interest debt includes credit card debt and any other personal debt with an interest rate of above 7% or 8%. 

Paying these debts is vital because you’ll have less pressure when the economy slows down. 

Can you imagine losing your job and having to watch your debts skyrocket? 

Keep investing

Do not be tempted to sell your stocks because other people are doing it out of fear and uncertainty. You need to continue investing. Stocks rise and fall all the time!

During an economy slowdown, you get to buy asset cheaply, e.g., stocks, bonds, mutual funds, real estate, and businesses. Keep your eyes open and get yourself several assets. The economy will eventually improve and guess who will have played his cards right? You!

Ideas for investing during a recession:

  • Buy stocks in an industry that will still be okay during a downturn, such as the auto parts retailers. Since most people will not be buying new cars, they’ll be repairing their old cars.
  • Invest in a sector that is not dependent on the economy, such as the healthcare sector.
  • Also, continue contributing to your 401(k), 403(b), or any other retirement account that is employer-sponsored.

Build multiple streams of income

Do not solely rely on your 9-5 because with recession comes layoffs and pay cuts. When you have different streams of income, you’re safe. It’s also easier to save more on your emergency fund, pay down debt, and more to invest

Work towards improving your credit 

It’s essential to have a good score because, as mentioned above, asset prices go down. You might, therefore, be willing to buy a home during a recession, and you can be sure that it’s extremely difficult to get a loan during this time. Lenders only lend to those with good credit. Therefore, it’s essential to boost your credit.

Get your finances in order!

The above steps will not only help you get ready for a recession. They can help you become successful no matter what the economy looks like. Go out there and secure your future.

How are you preparing yourself for an inevitable recession for the next few years? Let us know in the comments.

Caroline Wanjiru

May 25, 2020