2021 has been an excellent year for investing in the stock market. The FTSE 100 is up 9% this year, the S&P 500 is up 22%, and things are looking great for this year. The problem, they’re looking too good. This massive growth has been due to government bond-buying programs across the world. The Federal Reserve keeps interest rates at near-zero while it buys $120 billion of Bonds every month. In Europe, it’s no better, the ECB has been buying 85 billion euros per month in government and corporate bonds. All this excess money floating around has created a stock-market bubble that at some point must end, and when it does, the results are likely not to be pretty.
Ways to Prepare for a Recession
Hearing the word recession creates a feeling of discomfort for many. Over the years, we have seen some big recessions, with significant stock market declines, job losses, and more. But what does it mean for your personal finances, and what can you do to still thrive financially during a recession?
Preparing for a recession is essential to your financial security. Knowing how it affects the economy and your finances while taking a few critical steps will help you during an economic downturn. Let’s get into what it all means and how you can prepare for a recession.
Have an Emergency Fund
Standard thoughts on this have been three to six months of expenses available in cash in an accessible bank account. This amount is connected to how long it might take you to find another job, i.e. 3- 6 months, and includes the types of costs that might come up in day-to-day life.
If you don’t have an emergency fund in place, every unexpected expense or money challenge becomes a crisis. Set up a separate account, name it the Emergency fund and automate money being transferred into it every month. Start small, start now.
Live Within Your Means
Spending less than you earn or earning more than you spend will put you in a much safer place. This will already give you some breathing space in your finances to flex when things go wrong.
If you spend all your income, you have no safety net for any changes. If you spend more than you earn, you have a one-way ticket to bankruptcy / financial anxiety. You will need to work for money forever. You will be digging a bigger and bigger whole that you will need to try and get out of at some point.
Track Your Spending
Keeping a budget will help you live within your means. If you set how and where you want to spend your money, you can make sure you live within your means. If you know where your money is going, you can review if you are happy with this. You can also review if you can get what you want or need cheaper elsewhere? Can you cut down on how much you spend, and ultimately, can you cut it out?
By reviewing how and where you spend your money, you can evaluate are you happy with it? Are you getting what you wanted from the things you bought and from the money you spent all that time working for?
Start a Side Hustle
Having more than one source of income is going to give you greater security. If you lose your primary source of income, it can be very frustrating, but less so if you have a secondary income.
I have discussed this many times across this blog. Today I have a second, a third and probably a fourth income, however, it all started through blogging and building content websites that made income and could be sold.
Do you have a skill or hobby that other people will pay to hear about or be taught? Crafts, languages, DIY or skills related to your job?
Pay down or pay off debt
You could choose to pay off or pay down some of your more expensive debt. Debt is a drag on all your finances, well-being and wealth building. Even if all businesses close and you are made redundant, the debt collectors will still call, so it’s better to have a plan to pay them off.
You could set up additional payments to pay it down faster – the debt avalanche method. Or You could try and pay off the smallest debts as quick as possible to see progress asap – the debt snowball method. As debt can be a complicated subject depending on how it fits into your overall financial situation, an excellent place to get free advice is through Steep change and the Money advice service.
Have you ever heard the saying, don’t put all your eggs in one basket? Well, the same line of thinking applies to your investments. It’s important to have a well-diversified investment portfolio. That means your investments should not all be tied up in one stock or one real estate property.
You want to make sure your investments are spread across multiple industries and areas, so if one industry or area experiences a decline, it doesn’t sink your entire portfolio. For example, if you are invested in the stock market, you can spread your investments across multiple sectors such as consumer goods, healthcare, technology, etc. Mutual funds and index funds are both great ways to diversify. You can also choose to invest in the stock market (funds and bonds), the real estate market, and small businesses.
Whatever you invest in, be sure to do your research, be clear on your investment objectives and understand your risk tolerance. A big mistake people make is that they start selling every investment they own when the economy dips.
If you have a clear plan for your investments and you’re in it for the long term, you are in a good place. Your investment is likely to weather a bad economy and come out on top. Talk to a financial advisor if you are confused or feeling stuck regarding what to do. Prepare for a recession by diversifying your investments wisely.
Consider a Recession-Proof Job
Another way to prepare for a recession is to consider a recession-proof job. Healthcare workers, teachers, pharmacists are types of jobs in demand even during a recession. Expanding your skills is excellent for job security, especially when it comes to working remotely.
Companies are shifting towards remote positions now more than ever. Since work from home jobs are on the rise, why not consider starting your own home-based business? You can make a great living doing a variety of different jobs at home.
Live on one income and Save the Other
One of the savviest financial moves you can make to prepare for a recession is shifting to live on one income and save the other. Getting frugal with your budget and reducing expenses can free up a lot of money to save for a rainy day.
The goal is to reduce your cost of living enough to free up the second salary altogether. You will bulk up your emergency fund and not rely on a second income in the event of a job loss. Living below your means is the best way to prepare for the unexpected.
Few good decisions are made from a place of panic, especially ones with significant lasting outcomes. Once you start panicking, all bets are off. You are now at risk of making a series of bad decisions.
While you can’t predict when a recession will happen, it makes sense to always be prepared. Apply these tips to prepare for a recession properly. This way, you aren’t taken off guard financially, and you will have everything in place to prevent financial disaster. Living a frugal lifestyle, bulking up your savings, and creating multiple streams of income will help secure your financial future.