During a recession, your wealth can take a major hit – which, unfortunately, many people found out during the Great Recession in the late 2000s.
But, what are recessions exactly?
Well, according to Investopedia:
“A recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade.
The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (or GDP)…”
Alright, so what does this even mean?
Well, if the entire economy is slowing down for six months – meaning, no one is hiring, no one is shopping, and no one is producing – then we are in a recession.
And you can see how this can turn into a downward spiral, right?
If – for whatever reason – people stop buying things, then producers will cut down on the amount of stuff they make because they have no one to sell it to. If producers stop making as much stuff, then they start to lay off their workers because they don’t need them to make more stuff.
Those same workers will also stop buying stuff because they don’t have the money to pay for it, and then more producers stop making as much stuff because they can’t sell to those people, and they lay off more workers, and then the spiral keeps spinning and spinning downward.
Pretty scary, right?
Well, you can be scared or you can just be prepared.
Because, look – if you take a look at the history of GDP in the United States, you will realize that recessions aren’t new – in fact, they happen pretty darn often.
On average, recessions in the United States have occurred about once every 5 years since the Great Depression.
So, now that you know what recessions are and how they work – let’s talk about the 5 different ways to prepare yourself for the next one:
Step #1: Step up your emergency fund
As we mentioned above, one common characteristic of a recession is a decline in hiring – meaning, people are laying off workers and many of them are no longer hiring either. If – God forbid – you were to lose your job and unable to find another one, the LAST thing you want to do is to to dip into your investment accounts or – even worse – get into debt.
So what do you do?
Get prepared by building an emergency fund.
If you already have 3 months saved, try building it up to 6. If you already 6 months, try doing the full year. And, if you have no idea what I’m talking about, see my previous video about why we need emergency funds.
Step #2 – Get Rid of Your Debt
Believe me – if you’re out of a job and having a really hard time trying to find a new one, the LAST thing want is debt collectors and loan collectors breathing down your back, and asking you, “Where’s my money?”
It really sucks, and it’s really stressful and the best thing to do now is just prepare yourself by getting rid of as much debt as humanly possible.
Step #3 – Cut Down on Your Expenses
So, a funny term that you’ll hear a lot in the personal finance community is “lifestyle inflation” – which basically means, as you make more money, your lifestyle expands to meet it.
But, in a recession, lifestyle inflation is actually pretty dangerous
For instance – if you get a new raise – it’s not a great idea to go out and sign a year lease on an apartment that’s $1,000 more per month than the one you have now. And, if you lose your job, you’re on the hook for the rest of the year for an apartment you can’t even afford.
Remember: raises are for saving, they’re not for spending.
So, try to keep your expenses as low as you possibly can.
Step #4 – Start a Side Hustle
Recessions and economic downturns are always much kinder to those who hustle. And, this makes sense – right?
If you lose your 9-5 – but you have a profitable gig on the side – while it may not be ideal, you’re actually a lot better equipped to take care of your expenses and less likely to dip into your investments or go into credit card debt. And there’s many different ways that you can earn extra money on the side: you can write articles for bloggers, you can braid hair, or you can do freelance marketing for small businesses.
Upwork is a really great site for people that are just getting started, and I’ve used it to write articles for other people and make money.
I’ll talk more about this topic in the future, but – for now – just know that Google is your friend, and there are ton of resources online that can help you get started.
Step #5 – Learn New Marketable Skills
During a recession, it is true that a lot of people stop hiring, but – for those who still have positions open – they’re looking for people that can bring a lot of skills because then they can essentially get more bang for their buck.
Now, I don’t mean that you should go out and learn how to fix cars if you’re a biology teacher (although, that’s not necessarily a bad thing). But, if you are a biology teacher, you can learn how to garden so when you’re out looking for a new position, you can tell potential schools, “Hey – I know how to plant a garden and if you hire me, I can start a community garden for your school.”
By the way, if you’re a biology teacher that also gardens for schools, please let me know because that is awesome.
So, clearly I didn’t cover every single possible way on the planet that you can prepare for a recession so if you have your own tips, I invite you to share yours in the comment section below! Thanks for stopping by, and I’ll see you all next time.
If you want to watch this post via video, you can also check me out below.