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How to prepare for a recession? 9 ways to help overcome the economic downturn.
Today we’ll address a less-than-fun topic: how to prepare for a recession.
Unfortunately it now appears highly likely that we’ll enter into a recession in 2020. The Coronavirus (COVID-19) has dropped a bomb squarely at the center of our global economy. Supply chains are disrupted. Demand for most products and services is down. Travel is almost non-existent. Businesses have begun cutting back. Stock markets are crashing and people are scared. It’s a very sad and difficult situation.
The good news is that this too shall pass. It may take months. It may take years. But this too shall pass. That said, making preparations is essential. Remember that Ben Franklin quote “a failure to prepare is preparing to fail“? Well it rings true in times of financial stress. Thinking through how to prepare for a recession is essential.
Let’s share nine actionable tips on how to prepare for a recession.
9 Tips On How To Prepare For A Recession
#1: Cut Your Expenses
It’s time to batten down the hatches folks. I’m talking cutting back on all non-essential expenses. It’s always good advice to live below your means but this advice especially rings true during a recession.
Given Coronavirus is resulting in many people staying home, it should be relatively easy to cut back on variable expenses. You likely won’t be taking that once-in-a-lifetime vacation to Rome anytime soon or be tempted to spend your days in crowded shopping malls.
How to prepare for a recession by cutting expenses:
- Restrict any major purchases
- Delay buying a new car (and if you have to buy a car consider buying used)
- Hold off on home remodeling projects
- Skip upgrading your iPhone
- Look for ways to skinny down your lifestyle
- Eat at home and cut back on dining out
- Scale back or cancel your vacation
- Cancel or downgrade gym membership and exercise at home
- Take public transit instead of Uber
Essentially we’re working to cut any ‘nice to have‘ type spending and leaving only ‘need to have‘ expenditures.
Some of these cuts are especially hard because they impact some of the more economically vulnerable people in our economy. Gig workers, service workers, etc. But the harsh truth is that you need to secure your oxygen mask before trying to help anyone else. If you can continue to support housekeepers, handymen, and local restaurants then by all means continue to do so. But be mindful of your own financial situation so you can make it through the recession intact.
Why is it important to cut expenses? You want to give yourself as much financial cushion as possible to absorb negatives like job loss or a significant decline in your investments. As you think through how to prepare for a recession, cutting your expenses is a no-brainer. And while it’s certainly not fun it is something most all of us can do.
#2: Build Up Your Emergency Fund
If you haven’t already, now is the time to reinforce your emergency fund.
What is an emergency fund? It’s simply a savings account that contains 6+ months of living expenses. The purpose of an emergency fund is to provide financial stability and buy you time in the event of an emergency.
How to prepare for a recession by building up an emergency fund:
- Already have 6+ months of living expenses saved? Kudos to you for being well prepared. Consider saving even more to prepare for the unknown.
- Have less than 6 months of living expenses saved? Begin funding your emergency fund with cash saved from cutting expenses.
Why have an emergency fund?
- Helps protect you in the event of a job loss
- Provides a cushion for major medical event
- Credit may be difficult to come by in a recession so having cash is vital
#3: Protect Your Job
The sad reality is many employers will be laying people off in 2020. If your own income declined you’d likely have to cut back on your expenses right? A business is no different. As sales have fall, businesses have to make tough decisions on how to cut expenses. Given that people are one the biggest expenses most businesses have, layoffs are often part of the equation.
How can you give yourself the best odds at surviving layoffs? Here are a few ideas on how to prepare for a recession when it comes to your profession.
How to prepare for a recession by protecting your job:
- Stay flexible: In light of COVID-19 many employers are figuring things out on the fly. Where to work, how to work, what to work on, etc. If you take a rigid ‘this is the way we always do things‘ stance it’s not going to help matters. Stay flexible and adapt to the new reality.
- Produce high-quality work: This one sounds obvious but now is not the time to slack off. It’s hard to change your reputation but in times of stress having an ‘owner mindset’ and continually working to be viewed as a high performer within your company can go a long way.
- Be a source of positivity: Attitude is everything as they say. Keep a smile on your face and a good attitude as best you can.
- Manage your relationships with key decision makers: I’ve been through layoffs at many companies. The non-scientific nature of layoffs always surprises me. Often it is a group of people in a room going down a list and quickly making decisions on who stays and who goes. Now is the time to ensure your relationship with your boss and boss’s boss is as strong as it can be. If you have an adversarial relationship it’s easier for them to justify putting you on the chopping block.
Obviously you can still do everything right and still lose your job. Wrong place wrong time. That is the sad reality of a recession. A lot of highly talented people will be looking for work.
#4: Supplement Your Income
A recession often shakes up many of our assumptions. A job we thought was stable may not be quite so stable after all. I’m a huge proponent of side hustles as a way to supplement your income.
How to prepare for a recession by supplementing your income:
- Start a blog: The nice thing about starting a blog is that it costs virtually nothing to start. If you’re interested in starting a blog check out this post.
- Start an Amazon business: Amazon FBA the business model I had a lot of success with. Essentially you import goods and sell them at a higher price on Amazon. You can learn more about this business model here.
- Fast cash: Here is an article about 50 ways to earn some quick cash. None of these will make you rich but can put a few extra dollars in your pocket.
#5: Create A Budget and Financial Plan
Having a financial plan is EVERYTHING. It’s crazy to me that more people don’t have a financial plan.
Imagine if you were training for a marathon. You wouldn’t just go outside and haphazardly start running. Instead you’d create a plan and then go out an execute on the plan. The same thing applies to our finances.
How to prepare for a recession by creating a budget:
- Create a simple budget! If you don’t have a financial plan now is the time to build one
In a future post I’ll detail how to make a simple financial plan as well as a simple budget. No matter what format you use the important thing is tracking spending to ensure you’re staying within your limits.
#6: Assess Your Asset Allocation
As asset allocation is a by-type breakdown of your assets. For instance, you might have 80% stocks, 10% bonds, and 10% cash. This would be a pretty standard asset allocation for someone in their 30’s.
Given the huge losses in stocks it’s
How to prepare for a recession by assessing your asset allocation:
- Check your allocations: Maybe that 100% stock portfolio wasn’t
- Re-balance: If you’re 80/20 stock to bond portfolio is now 70/30 consider selling bonds and buying stocks. Create a solid plan and follow it.
#7: Consider Refinancing Your Student Loan Debt and/or Mortgage
The one bright side of the current economic crisis is low interest rates.
How to prepare for a recession by refinancing:
- Home loans: Rates are at historic lows. Reach out to lenders, re-fi, and save some money on your monthly payment
- Student loans: Again, rates are low and chances are it makes sense to refinance
#8: Continue Investing
It feels so hard to continue to put money into a 401(k) only to watch it drop 10%+ literally within a day. It’s just an awful feeling.
But very few people can successfully time the market. It’s best to just solider on and continue to make your regular contributions. Remember you can’t access a 401(k) until your retirement years. In all likelihood the stock market will be higher then than it is today.
How to prepare for a recession by investing:
- If possible, continue to systematically invest in the market. Remember the goal isn’t just to be buying when times are good but also when they are bad. Continue to contribute to your 401(k) and Roth IRA. It’s impossible to pick a bottom so dollar cost averaging in is a fine approach.
#9: Rationally Prepare (And Try Not To Freak Out!)
The next months or even year(s) could be rough.
A few of the questions we may be faced with:
- If you have kids, what are you going to do in the event their daycare or school is closed for an extended period of time?
- What is your game-plan for elderly parents or grandparents?
- How will you balance your personal finances, professional obligations, and your family situation?
There are no easy answers to these questions but that doesn’t mean you shouldn’t take the time to make a plan. Even if the plan is imperfect or scary it’s better to have a plan than not. Freaking out and doing nothing won’t help anything (not freaking out is easier said than done to be sure).
What is a Recession?
So what is a recession anyway? The textbook definition of a recession is when a county’s GDP (Gross Domestic Product) has negative growth for two consecutive quarters.
Economists have made the definition a bit more flexible in recent times.
What is a recession? Here are a few tell-tale signs:
- Elevated unemployment
- Falling incomes
- Slow down in business activity and spending
- Slow down in consumer spending
- Increased business failures
Recession Proof Jobs 2020
Here are a few jobs that we predict will largely be spared in the coming recession:
- Medical services professionals (Doctors, nurses, EMTs, etc)
- Mental Health Professionals
- Educators (Teachers and Professors)
- Police Officers
- Accountants & Auditors
- Funeral Related Jobs
- Utility Workers
- Food Service Providers
Recession Proof Industries 2020
Our prediction on industries that will fare relatively well in the recession:
- Core Food & Beverage (more people eat low-cost items at home)
- Senior Care
Recession Proof Businesses 2020
You’ll hear a lot of talking about the importance of businesses having a strong balance sheet. What does that mean in normal person talk?
Simply put, having a strong balance sheet means having a lot of cash on hand and without a lot of debt.
Consider yourself. If you have enough cash to pay the bills for the next year and don’t have any debt this recession won’t be comfortable but chances are you’ll make it through. On the other hand, if you’re living paycheck to paycheck and have considerable debt chances are it’s going to be a rough ride in the near term. One bump in the night can make everything fall apart.
The businesses that are best prepared to survive the recession are those that have sufficient cash reserves and low/no debt. If you’re working ideally you’re employed at a company with a strong balance sheet and in an industry well-positioned to survive the recession.
How to prepare for a recession: final thoughts
The reality is that a recession brings a lot of very hard times for many individuals and families. Losing a job is hard. Being unable to pay the bills is hard. Rationale thinking and preparing for worst case scenarios is prudent. Cut back and hunker down. Prepare for a rocky road ahead.
Also try to remember to have compassion for your fellow humans. We’re all in this together. Hopefully the cracks shown in our economy, government and society can unify us rather than divide us and we can come out stronger on the other side. As a species we’ve survived a lot and we’ll survive this too. See you on the other side.