Stock market is down, gas and food prices and interest rates are up, and more experts warn the odds of the economy tumbling into a recession are rising. It seems just not too long ago, we experienced and recovered from the 2008 recession because of the subprime mortgage crisis and stock market crash. I personally hope it won’t get as bad as what we had in 2008, but if what the financial experts are saying is true, the question is – how to prepare for recession and embrace ourselves for the upcoming financial crisis?
First of all, what is a recession?
According to dictionary.com, a recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. The National Bureau of Economic Research says a recession happens when there’s a significant decline in economic activity spread across the economy and lasts more than a few months. The result of this economic decline can severely impact your personal finances.
Not knowing how to prepare and come up with a plan for a recession is probably the scariest part of it. Below are my thoughts about what we can do to prepare for a possible recession.
Eight great ways on how to prepare for a recession:
1. Stay calm and don’t panic
First all, we all know that panicking isn’t going to solve any issues. On the contrary, it may bring additional unneeded stress into an already stressful situation. For time like this, the first step is to calm ourselves down and come up with a plan to move forward.
2. Budget – A holistic and honest view to your finances
If you haven’t done so, it’s time to review your personal finances and identify your needs and financial health. Identify the income you bring home and essential spending each month. Some of the essential spending includes rent or housing related expenses, food, utilities, transportation, and medical needs. Essential means absolute necessities. Allocate your budget accordingly and trim down other expenses and put the money aside in the saving account for an emergency fund. If you have, use the info to create a backup budget for the future.
3. Cash is king
I lived through 2000, 2008 and COVID recessions. I remember financial experts kept emphasizing “Cash is king” during those times. Most financial experts recommend having six to nine months of living expenses put aside for an emergency fund, which will allow you to continue paying for the necessities should you lose a job for a period of time. If you don’t yet have the emergency fund, start saving as much as you can and build up at least a three-month reserve to start with. Liquid cash will get your through the tough time.
4. Eliminate high-interest debt
When a recession is on the way and the interest rates are rising rapidly like what we have seen in just the past few weeks, it’s even more important to work on your debt reduction. Many financial experts advise to focus on paying off the high-interest debt, oftentimes it’s the credit cards, because the cost of interest payment can be snowballed and eat up a big chunk of your payment. If you have a solid and secure job and are able, it’s time to aggressively pay down the debt. If you can’t increase your payment, find other banks who offer lower interest rates and transfer the balance to save yourself some money.
5. Live within your means
My first financial advice from a client during my first entrepreneurship is “live within your means.” At that time, I could afford and live an above-the-normal luxurious lifestyle. Why not, right? I respected Jim as he’s wise, humble yet successful, and I gave him my attentive ears. To be honest, it wasn’t easy in the beginning, but out of my respect for him, I’ve put it into practice ever since then. It’s a habit that requires practice and commitment, just like how you don’t expect to build up muscle overnight when you start to work out. As I age, I completely understand and appreciate what he had taught me. If you spend the money you don’t have, it will get harder when the economic situation gets worse. The key is to spend less than what you make and consistently put some money aside for an emergency fund.
6. Tackle small spending
Have you heard of the Latte Factor by David Bach? The concept is simple. Small amount of money spent on a regular basis cost us far more than we can imagine. A regular item majority of the population spends on is coffee. If a cup of latte is $4 at your favorite coffee shop, it’s very affordable on a daily basis, but it adds up to $120 a month. I am not suggesting you completely cut down your morning enjoyment, but even if you treat yourself three time a week, you will be able to put aside almost $70 for other use or saving. What are some of your regular small spending?
7. Invest in yourself professionally
Netflix has had two rounds of layoffs in the last 3 months, with the latest cut of 300 positions. As the companies cut back budgets and look for ways to reduce expenses during economic decline, people are afraid of losing their jobs. There’s absolutely no guarantee, but improving your skills, expertise and work performance, building a good reputation, taking on responsibilities and adding values, and being a contributing team member are ways to protect you from losing your job. When you are the solution to your company’s needs, you will always have better leverage during a challenging time.
8. Mindset matters
Mindset is everything and it contributes how we live our life each day. Recession could be hard to manage and feeling helpless and overwhelmed is normal. It’s especially crucial to remind yourselves that “all will be okay and this storm shall pass just like others in the past.” When you feel overwhelmed, take a walk, spend quiet time, meditate, talk to a trusted friend, and count your blessings and be grateful. A positive and growth mindset will sustain you along with other tips above during a recession.
We don’t know when a recession will take place, neither do we know how long it will last, and it only makes sense for us to always be prepared and ready. If you need someone to strategize on how to prepare for recession for yourself, your family or your career, go ahead and contact me today!