Can You Financially Prepare for a Recession?

June 26, 2023
June 26, 2023
A probability model from Ned Davis Research indicates there is currently a 91.8% chance of a global recession.

A recession can be a difficult time for anyone, and depending on your current situation, you might not be sure how you’d get through one.

The best way to be sure that you won’t run into any trouble is to be ready. Fortunately, there’s a range of things you can do so that you’ll be in a more secure position when a recession does come along.

For some of the key ways to prepare for a recession, keep reading.

What Is a Recession?

A recession is a period of economic decline. People often make claims of a recession before one has actually started. Technically, it’s officially a recession when there’s a decline in a country’s GDP (gross domestic product) for two or more consecutive quarters.

Recessions can cause financial issues for companies and individuals. As such, businesses tend to cut back on things like expenses and hiring, mainly due to uncertainty. Consumers also tend to spend less for the same reason.

The effects of a recession can result in higher unemployment, lower stock prices, and reduced economic activity. A variety of things can cause a recession, but they often stem from a combination of factors. Some common causes include a housing market crash, a rapid increase in interest rates, or a sizable reduction in government spending.

Other external factors such as natural disasters or a global economic downturn can also trigger recessions. A recession is typically considered to be a negative event, but many consider them to be necessary. They’re a part of the economic cycle, as the adjustments that happen throughout a recession can ultimately help set the stage for future growth.

A global recession is when this happens on a worldwide scale. This last one happened between December 2007 and June 2009. It was sparked by a downturn in the US housing market, but due to links in the global financial system, the effects were felt all over the world.

Best Ways to Prepare for a Recession

A recession can be caused by various things, and there is little that you can do to stop it. What you can do, however, is take precautions to prepare. This way, you can ensure that when a recession hits you’ll be in a position that will make things much easier for you.

Create a Spending Plan

Proper wealth management is always a useful skill, but even more so when a recession is on the way. One of the best things you can do ahead of a recession is to plan ahead. This will allow you to budget properly so that you can live within your means.

When creating your spending plan, you should prioritize any essential expenses. Make sure you can afford the things that are most important to you and cut back on any unnecessary expenses wherever possible. This will help you to save money so that you can ensure you have enough to weather a recession.

If you have a strong enough spending plan, you should be able to continue to earn more than you spend. This will allow you to set aside money for savings and investments.

Bolster Your Savings

Another key way to prepare for a recession is to bolster your savings. While you’re making enough money, you should regularly set some aside in a savings account, money market account, or another type of liquid account.

It’s always a good idea to have an emergency fund that you can easily access. With good saving strategies, you should try to save enough so that you can cover at least six months of expenses. Having this backup will give you a cushion if you lose your job or face other financial challenges during a recession.

Pay Off Debt

Debt can always be a burden, but even more so during a recession. The best way to resolve this is to pay off as much of your high-interest debt as possible before a recession hits. If you can eliminate your debt you won’t have to worry about it when things get worse.

You could have various kinds of debt such as credit card debt, personal loans, and more. The interest can vary, so it’s often best to prioritize debts with higher interest and get rid of them first. Having less debt will reduce your monthly expenses and free up more money to put into savings or investments.

Focus on Long-Term Investments

If you have a solid investment plan in place, then you may be able to keep going as you are even during a recession. Some people feel the need to alter their strategy and go for more recession-friendly investments, but trying to time the market often results in losses. A long-term strategy is usually less risky and less frustrating.

Investing for the long term means investing in assets that are more secure and likely to increase in value over time. This typically includes things like stocks, bonds and real estate.

It’s also a good idea to maintain a diverse portfolio. This will help keep you protected from market volatility and ensure that you have a stable, reliable source of income even during a recession.

Being Prepared for a Recession

Following the tips above will help you prepare for a recession. The sooner you start, the more secure you’ll be in times of financial uncertainty.

At Next Generation Advice, we offer guidance to help people manage their finances, which is essential for a recession. To find out more about how we can help you, click here to contact us today.

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