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How to Prepare for a Recession 1

How to Prepare for a Recession

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There is a lot of talk about the looming recession, or maybe even a depression, that is due any day now. If your financial situation is not that good, it is time to give it a tune-up in the event of an economic slowdown. Based on my experience from the previous recessions and stock market crashes, there are definitely some steps you can take to prepare for a recession. Here are 5 steps to help you prepare.

prepare for a recession

1. Practice Frugal and Debt-Free Living

I believe being frugal and avoiding debt is the basic foundation of financial success. In general, the whole idea can be distilled down to these 5 tenets:

  1. Spend Less than You Earn
  2. Buy Only What You Can Afford — This means you should not get into debt to buy things. Also, you should reduce your reliance on credit cards, and make a habit to pay off your balance in full every month.
  3. Cut Your Expenses — A good place to start is by setting up a budget. If you don’t budget, a money management tool like Mint.com or Personal Capital can make the process easier.
  4. Reduce Your Debt — With the exception of your home mortgage, you should actively try to eliminate your debt. A good place to start is learning about Dave Ramsey’s Debt Snowball or read our guide on How to Get Out of Debt Fast.
  5. Make Every Dollar Counts — Stretch your money and make every dollar count. A good place to start is with 40+ Ways to Save Money, Lower Your Bills, and Cut Expenses.

2. Bear-Proof Your Investment Portfolio

Over the years, I have come to believe that the best long-term investment strategy is to have a great Asset Allocation Plan and leverage a globally diversified investment portfolio consists of low-cost passively-managed ETFs that reflect your risk tolerance level and investment time horizon. This is a strategy that Larry Swedroe advocates, and you can read it in his book: The Only Guide to a Winning Investment Strategy You’ll Ever Need.

There are two main parts of this strategy:

  1. Have an Asset Allocation Plan – The plan should truthfully reflect your risk tolerance level and investment time horizon. Make sure you can live with the worst-case scenario and that you won’t panic sell. If this means moving your money to lower-risk investments, then do it.
  2. Diversify — Spread your investment across different asset classes, sectors, countries, and diversify beyond equities.

There are also numerous tactics to prepare your portfolio for a crash and invest during market downturns.

3. Establish an Emergency Plan

If you lose your ability to generate income, do you have enough cash reserve to stay afloat? More importantly, do you have an emergency plan to keep you out of trouble? Here are some good articles to get you started:

4. Protect Your Job

For most people, their job is their biggest source of income. During a recession, the chance of unemployment increases dramatically. Fortunately, there are a few things that you could do to protect your job.

  • Networking — If you haven’t done it already, this is a great time to start.
    • Get to know your peers and the higher-ups better.
    • Take on special projects that expose you to other people outside of your immediate workgroup.
    • Join caucus groups, industry groups, and associations.
  • Help your company increase profit and revenue
  • Help your company reduce expenses
  • Make sure your good work gets noticed
  • Expand your skillset — Getting a new certification or skill can make one much more marketable.

5. Diversify and Grow Your Alternative Income Streams

Now that you all your bases covered, it’s time to think about different ways to increase your income. If you are reluctant to start building alternative income streams, I’d like you to consider this statement carefully:

Your job is not going to be there forever. You can’t work forever. And you can’t retire until you figure out a way to replace income from your job.

Don’t wait. The best time to start building your alternative income streams is now.

Bottom Line

You cannot control the economy, but you can control your finances. There are steps you can take to put you in a better position to withstand an economic crisis. Regardless of the economy, these 5 steps contain responsible and sensible financial management strategies — something that should be practiced daily, and not only during an economic turmoil.

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Vered
12 years ago

Great article – thanks.

“Spend less than you earn” – saving? It’s been a while since Americans have done that.

According to MSN’s Money Central, Americans’ personal savings fell to -0.5% last year, the first time since the Depression that the savings rate has been negative for a year.

part of that may be that Americans have been feeling wealthy since their homes were appreciating so much. Maybe now, with less confidence, savings rates will start improving.

squawkfox
squawkfox
12 years ago

Diversifying income streams is a huge advantage during an economic downturn. Decoupling one’s income with a single market is a surefire way to survive a recession. I suppose this is one reason having a job is a poor long-term approach to building wealth as you are tightly-coupled with your employer’s market performance for a salary.

Patrick
12 years ago

Great tips, Pinyo. I think the tips on diversification are great – diversification with income, investments, etc. Protecting your job is another extremely important thing to do, and your tips are excellent. One thing you could add is expand your skillset during this time. Getting a new certification or skill can make one much more marketable.

jay
jay
12 years ago

What a great time TO diversify! investments, for sure; but also job skills. I am trying (with limited success) to encourage our college aged kids to VOLUNTEER for what have, in the past, been salaried jobs. My reasoning is schools, public services, even businesses, still need folks–they just can’t pay for them right now. Great opportunity to get that all important experience, when they’ll be grateful for the help, willing to take the inexperienced, and one can position oneself for what will eventually turn around and become a paying position/job skill.

Anthony Imperioli
Anthony Imperioli
12 years ago

Instead of spending less than you earn, I like to think of it as earning more than you spend. It gives you that drive to seek out different opportunities. Regardless of the economy.

Minimum Wage
Minimum Wage
12 years ago

Are there any strategies to survive an economic speedup?

Randall
Randall
12 years ago

@MinWage,
A yacht, private island and some armed, but discreet guards was what I had planned for an economic speedup. Richard Branson beat me to the punch though.

@Pinyo, great post. Very timely and informative. Thanks for including a link to me too! 🙂

Ron
12 years ago

Thanks for the link to my article, Pinyo!

SavingDiva
SavingDiva
12 years ago

I’m working on all of the above! Great post! I have to admit that I’m trying to beef up my EF as quickly as possible!

Minimum Wage
Minimum Wage
12 years ago

Randall –

That’s hilarious! But while the question appears ridiculous, it is a sincere question.

Economic speedup –> job growth –> more people employed –> unemployed twentysomethings living with parents move out and get their own housing –> rental vacancy rates decline –> rents go up while the already-employed unskilled worker didn’t get a raise.

AJC
12 years ago

Agree! But, I would add one other: build up your “war chest” so that you can pick up some investment bargains (be they stocks and/or real-estate) as and when you are ready … I missed some of the last couple of years of the Bull Run because I progressively cashed up to take advantage of the Bear market that was sure to come … and did. Just remember: after every bottom there is another top …

jeff
jeff
12 years ago

This is the right way to run your finances regardless of the economic climate. Of course, people are a lot more interested when they have a little fear in them. Great suggestions!

Newb
Newb
12 years ago

This is a great advice for any kind of economic situation.

Jonathan
Jonathan
12 years ago

These are excellent cornerstones to work by. I especially agree with frugal living and diversification. The more flexibile and adaptable you are as an employee, then the more valuable. So get on as many training programmes as your budget can afford or that you employer will pay for.

Aya
11 years ago

I’d definitely consider diversifying but I feel like a lot of those take a lot of time or they require that you already have a lot of stuff to offer. I remember selling a bunch of stuff on ebay but it took up so much energy in putting everything up and I wasn’t sure if it was worth my time. Then, I just ran out of things to sell. Frugal living seems like the popular way to go, and you probably end up feeling good about yourself – kind of like beating the system.

Jonathan
Jonathan
11 years ago

I think that now more than ever, frugal living has become essential to surviving the global recession that we now find outselves in.

Aya
11 years ago

@Pinyo – I see your point, and you need to have a steady income in order to move on to diversifing, which means its a big effort. However, I can imagine that for someone with a steady income but is interested in other venues, it can be an appealing strategy. I am far away from even considering other options, which may be why I am not able to think about it on the same terms as you?

Kevin
Kevin
11 years ago

I think the emergency fund is the best thing right now. I suggest that people pour money into it. If you don’t already have 6 months saved, get yourself there. If you already have six months, take it to 8 months. When the economy gets back on track, you can always take out some of it and put it wherever you want, but to have it there for emergencies during an economic emergency is the best thing

stan
stan
11 years ago

The financial crisis is spreading to all the sectors and the ultimate results will be available by the end of 2009. Anyway the crisis is very crucial to all western markets since its a prestigious counter movement from these governments and it should show some good results by the mid of next year at least. But in terms of Asian countries, it is a good opportunity to find alternative solutions and reconfirm their best practices followed over the past years. Some of the basic causes of financial crisis is, bad credit loans processed by the financial institutions to the customers… Read more »

Mark
Mark
11 years ago

With the greatest respect we can all make savings and cutbacks and be more conscientious about our earnings and our spending. I believe that it is up to each of us to protect our homes for our families. Not just with life insurance in case we die or have a critical illness. We need to consider the consequences of either ourselves or our partners losing their jobs through redundancy and then being out of work for a long term. These circumstances can and do cause many people to slip into debt. Therefore as part of any Survival plan you should… Read more »

Steve C
11 years ago

Of all the items you listed above, I think #5 Establish alternative incomes is by far the most important. Unfortunately, it’s also the bullet point that takes the most planning and time. Once you have multiple forms of income though, it’s almost impossible to lose everything at once. Being frugal helps too. Great post!

Alisa
Alisa
11 years ago

Great Post. In this economy it is so critical to have alternate streams of income. The job that you have today may not be there tomorrow. I like to take the alternate streams idea a little further. You know how we talk about diversifying our investment portfolio? I think it is a good idea to even diversify the work that you do to generate income. For example, if I am a laborer and hurt my back and am out of work for 3 – 6 months; I can possibly make additional money consulting, blogging, or doing anything else that does… Read more »

The Credit Toolbox
The Credit Toolbox
11 years ago

In order to protect myself, I decided to create an alternative source of income via internet website. While I am not making as much as my regular job, I now have 2 different sources of income. If I ever lose my job, I’ll be able to concentrate on my small business and still be able to eat 3 meals a day 😉 Another trick is to visualize what would happen. Try to imagine that today is your last day at work; what you would do in the next 5 days? If you have an idea, you won’t be losing time… Read more »

How to Prepare for a Recession

by Pinyo Bhulipongsanon time to read: 3 min
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