ith the global economy teetering on an unstable financial cliff, it’s never been more important to prepare for the worst. But with many people unsure what to expect and where their next meal will come from, as well as rising costs of everything from housing to education and a lack of trust in institutions, this is an especially challenging time for individual preparedness.
The good news is that even if the worst does come to pass, there are still a number of things you can do now to mitigate some of the negative effects on your personal finances. A recession is a natural part of the business cycle that typically occurs once every seven years or so. It’s when sales growth slows down and businesses start trimming back their payrolls and cutting back on investments. This means that when one happens, it’s likely it will follow shortly afterward.
That being said, there are a number of things you can do now to reduce its impact on your finances and prepare for a downturn. Here are 7 practical steps you can take today.
1. Start Building an Emergency Fund
You should always have a good amount of money saved up, but it’s especially important to do so in the event of a recession. If you are one of the many people who thought that now is too early to start saving, now is exactly the time to put your money away.
The best way to build an emergency fund is by setting aside at least 6-12 months worth of living expenses in an easily accessible savings account or even cash under your mattress.
This way no matter what happens, you and your family are taken care of for the next 6-18 months.
On top of that, the emergency fund will give you a peace of mind and psychologically speaking, you’re not going to be afraid of any economic turbulence.
2. Make Lifestyle Adjustments
The most important thing to do during a recession is to make lifestyle adjustments.
If you have 10 different subscriptions and you only use 3 of them, it’s time to cut the other 7.
A lot of platforms and apps charge some sort of subscription fee.
Sooner or later, these fees will really add up and end up taking a big chunk of your expenses.
3. Start Tracking Your Finances
The first step you should take to prepare for a recession is to start tracking your spending. By doing so, you’ll be able to see how much money you’re spending on things that aren’t essential and what you can do to change your spending behavior. If you find that there are certain categories of expenditure that have been particularly high or low, then it may be time to speak with a financial planner who can help set your priority in cases like these.
I started tracking my finances over 5 years ago and it really transformed my life completely.
If you don't track your spending, you really don't know where the leak is.
On top of that, finance or expense tracking gives your better insight of how you’re doing financially. You gain more confidence and it helps to reduce money anxiety and eliminate financial stress.
I came up with this method that uses Google Sheets and Google Forms to automate my finance tracking. I made this into a template free for everyone to download:
4. Start Paying Off Your Debt
In today’s economy, people are often stretched thin when it comes to debt. So the smart play is to pay down your debts as quickly as possible. You can tackle this task by paying off your current debt with your high-interest debt or by borrowing from a bank at a lower rate than the interest rates you’re currently paying.
In addition, if you have a lot of credit card debt, look into transferring these balances to a new credit card with 0 percent interest for 12 months that has rewards incentives attached. If you don’t make enough money to cover your everyday expenses and still have some left over each month, consider putting that money into an emergency fund in case you find yourself in a tight situation down the line.
Now, just to clarity, I’m not talking about the good debt, if you have a mortgage loan for a rental property that produces positive cash flow every month, that’s considered as good debt. I’m referring to bad debt such as credit cards, student loan or borrowed money buying liability instead of assets.
In my personal experiences, money flows way easier when you’re debt free.
I know for some of you, this is hard, you're barely making ends meet every month never mind paying off your debt.
This leads to my last point, you want to start tracking finances and cut the unnecessary spending and use it towards paying off your debt.
5. Hold Off on Big Purchases
Most people don’t like to hear it, but the best time to shop is when sales are low and prices are high. That way, you can buy more for less and still save yourself some money. Now is not a good time to make a big purchase for your home or car, though. Instead, hold off on any big purchases until the economy starts to recover.
Things like cars, luxury items or fancy vacations could be detrimental during a recession.
The value of these things will drop over time, sometimes immediately after purchase.
Instead of making irrational purchasing decisions on these big ticket items, you can simply hold off until the storm is over.
6. Consider a recession proof job
If you’re looking for a job that will provide security and stability in the event of a recession, consider one that is recession-proof. Jobs like working in education, healthcare or social services have some of the lowest unemployment rates out there.
That being said, these types of jobs may not be your cup of tea if you have an entrepreneurial spirit and want to start your own business. If you’re already working in these fields, then preparing by finding your next opportunity might help you avoid layoffs when the time comes. But if you don’t currently work in these industries and are looking for a recession-proof job, it’s worth considering a role that has fewer opportunities for growth but provides more stability.
Realistically, a lot of jobs will be wiped out in the next 10-20 years due to fast advanced technology like AI, etc
Some job options are considered recession proof, such as:
- IT professionals in the tech industry
- Utility workers
- Medical or healthcare providers
- Insurance providers
No matter what happens to our economy, people still use tech every day, they still need healthcare or insurance.
I remember reading about 3 big necessities that all human need:
500 years ago, we still ate food, drank water and needed a shelter or place to live
That’s why restaurants are still everywhere and real estate industry is still in high demand and growing every year from macro perspective.
Which leads to my last point...
7. Build multiple streams of income
It’s important to prepare for a recession by building multiple streams of income. This can be done through investing in the stock market, real estate, or starting a business. But rather than just saving your money and hoping for the best, it’s better to diversify your wealth.
I’m sure a lot of you came to this conclusion in the last couple years that things are really unpredictable in the world. The most risky move you can make now is to put all your eggs in one basket. In terms of your finances, you can no longer rely on single source of income.
If you have a high-risk tolerance and are willing to take calculated risks with your portfolio, then you could even invest in cryptocurrencies like Bitcoin or Ethereum. To start building multiple streams of income, think about all the different ways you can make money while also saving some capital for a rainy day fund or future expenses.
For example, one way to develop multiple money-making sources is investing in stocks that pay dividends. You won't see any returns on these investments until they mature, but if you invest $1,000 in stocks that pay dividends each year and earn 8 percent annually over 10 years, then you'll get $92 back every year for 10 years and have more than $90,000 at the end of the 10 years invested! (The power of compounding)
“Never depend on a single income, make investments to create a second source.” -Warren Buffet
Now, keep in mind that if you wan to grow multiple streams of income, you need to firstly focus on ONE stream until it makes you money. Then and only then, you may want to consider adding a second or third. Otherwise, you end up having streams of no-income.
According to the IRS, on average, millionaires have around 7 streams of income.
Common passive streams of income include:
- Dividend income from stocks you own
- Rents from your rental properties
- Royalties from selling rights to use something you’ve created or invented
- Capital gains from selling appreciated assets
- Profits from businesses that you own