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Recessions are not common, so it’s only natural that your first instinct is to panic when the threat of a recession looms.
Any period of noticeable economic decline that lasts for at least two consecutive financial quarters is referred to as a recession.
A declining economy affects various areas, from income and employment to retail sales and manufacturing. Recessions also have a negative impact on the growth rate of GDP (gross domestic product). This reflects the market value of goods and services.
Now, while you shouldn’t panic about a recession on the horizon, you certainly shouldn’t ignore it either.
1) Create an emergency fund
Job losses are commonplace in times of recession. Some industries will be hit harder than others.
Whether or not you feel like your job is in danger, it’s a good idea to start building an emergency fund.
To achieve this, you can start by minimizing expenses. Cut back on luxuries like eating out, traveling and having fun.
You should aim to accrue 6-12 months of living expenses. In the event of job loss or the need to pay more for medical bills or other benefits, an emergency fund to tap into will give you the respite you need until the economy rebounds.
2) Treat yourself to a secondary activity
When the economy slows, it’s the perfect time to secure a side business. Money earned from side gigs can be used to boost your emergency fund.
If you lose your job in a recession, having a side hustle to lean on will also provide you with at least some income until you get back on your feet.
Consider going freelance. Many microsites allow you to sell a variety of services to a market of willing buyers. Consider consulting work if you have marketable skills. Research all the ways you can create additional income streams based on your skills.
If you have a free room, you can consider renting it out to earn some extra money.
3) Improve your resume and stay marketable
Recessions affect employment, so it pays to keep your to resume fluent.
Include any new courses, workshops, or skills you may not have added since your last job search.
This is also a good time to investigate any relevant areas of personal development. Learning new skills will ensure you are more likely to be retained if your employer should start laying off staff.
Improving your skills will increase your chances of keeping a job and will also increase the likelihood of finding a new job if you need it.
4) Network aggressively
Whenever you think your livelihood might be in jeopardy, it pays to start networking preemptively with groups and businesses looking for people with your background and experience.
LinkedIn is a great platform to connect with hiring managers in your industry. You can also attend alumni networking events and join relevant local business groups.
Always have a well-rehearsed elevator pitch so you can sell yourself in 60 seconds flat. What do you do best and why should someone hire you?
5) Pay off the debt
The less you owe, the easier it will be for you to get out of the recession. You’ll have more money in your pocket each month, and you won’t waste money on interest payments either.
To reduce your obligations, you will have to stop increasing your credit card debt, and you will have to stop applying for other loans. If you can write a check and pay off your debt, do it. Don’t pay off all of the debt unless you already have a sufficient emergency fund.
If you are unable to repay all of the debt, increase the minimum payments and develop a plan to pay off that debt.
Look at your expenses and identify areas you could cut back on. Apply these savings to debt.
If you find a side business, use that money to pay off your debts.
Ultimately, eliminating debt saves money and can also boost your credit score. Then, if you need to borrow in the future, you should qualify for higher interest rates.
6) Consider an average cost investment strategy
A dollar-cost averaging strategy for investing can minimize your risk.
The objective of this strategy is simple: reduce the effects of volatility by investing a fixed amount in a specific stock or fund at regular intervals.
By putting your investments on autopilot, you remove the emotion from the process. Plus, you’ll avoid investing all your money each month to a point where the prices are exorbitant. You will be free to buy when more shares if prices are low and fewer shares if prices are rising.
7) Review your portfolio
If a recession seems likely, it’s wise to take a close look at your investment portfolio.
Could you make changes to better compensate for volatile times like the recession?
Is your portfolio sufficiently diversified?
Here are some ways to make sure your investments are protected:
- Talk to your financial advisor
- Consider investments with a history of market decline
- Ask for recommendations to balance your portfolio
While it’s natural to panic at first, it’s essential to maintain a long-term perspective when investing, even if you’re going through an economic downturn.
Markets tend to recover and stocks generally appreciate faster than bonds and other investments.
Final Thoughts
Fortunately, you can often catch the warnings of a recession before it happens. This means that in the majority of cases you have time to prepare.
The most effective strategy is to heed recession warnings and take the necessary preparatory steps. The worst thing you can do is panic and make reckless and impulsive financial moves.
If you need advice on rebalancing your portfolio, you should speak with a financial advisor.
Remember: the threat of a recession is not the time to take the ostrich approach. The more action you can take before a recession hits, the easier it will be for you to survive and maybe even thrive when times get tough.
