During a recession, markets have a tendency of pulling back, and the stock market may proceed into a bear market (this is where stock prices drop 20% or more from their most recent highs). Companies may freeze hiring, lay off workers or cut hours in order to stay afloat. Also, as demand for consumer products decrease, businesses tend to have a difficult time selling their inventory. This results in a situation where goods that were once “out of stock” or in extremely high demand may suddenly become available.
Here are 5 ways you can prepare for a recession:
- Ensure your financial plan is up-to-date
Nobody wants to be found in an awkward position when times get tough because you haven’t planned for a recession in advance.
Some factors to consider when reviewing your investment:
- What is your reason for investing? Is it a short-term objective such as putting a down payment on a house, or something more long-term like planning for retirement?
- How long were you planning to sustain your investment? Is it a couple of months, years, or are you dealing with a longer timeframe?
- Where are your investments? Have you invested all your money in a few assets, or have you diversified your investments?
- What action will you take if stock market prices drop 10%, 20% or 30%? Hold, sell, or buy?
- Will you require any of the cash invested in the near future? How shielded from market volatility do you need to be in order to stay afloat?
- Review Your Budget
It’s important to ask yourself, “How much income do I need to settle my bills and living expenses?” This is your basic earnings needed to survive, and you should make sure you can continue to earn this amount.
Are You Being Too Cautious in Retirement?
If you are married, plan for how your budget may look like if you or your spouse loses their job. If your budgets are constrained, look for areas where you can reduce spending, loans can be refinanced and some bills can be eliminated. Look for a healthy recovery in portfolio income and make some careful investments.
- Fully Fund Your Emergency Savings
As a general rule, you should have at least 3 months’ worth of expenses or $3,000 saved for an emergency, whichever amount is higher. A recession provides an excellent opportunity to become more aggressive and save for at least 6 months’ worth of expenses or $6,000, whichever amount is higher. Make sure your emergency cash is easily accessible and not held up in any investment to avoid potential losses from market instability.
- Pay Down Debt
Manage your debt by settling any high interest loans and credit card debts now when you still have a decent wage and the economic times are generally still bearable. You should also put a lot of emphasis on your credit rating in the event you need to borrow during an emergency.
- Network and earn extra money
Staying in touch with your professional network may improve your chances of landing a job, which could be useful in the event you need additional income or lose your job during a recession. You can also search for part-time jobs or consider starting a business you want to build now as a means of earning some passive income in the long-term, thereby diversifying your sources of income.
Although a recession may sound scary, it’s an unavoidable occurrence. We’ve experienced in 2001, 2009, and 2020 in this century alone. Educating yourself on the telltale signs of a recession, along with adequate preparation, is the best way to stay ahead of the curve and protect your interests.