Before getting on to how to survive a recession, let us understand what a recession is. A recession is a period of two or more consecutive quarters where the economy shrinks rather than grows. We are likely entering a recession right now.
With rising debt levels, fluctuating markets and dropping oil prices, having some money saving tips under your belt could be a lifesaver so that when worse comes to worse, you’ll know how to survive a recession.
Unfortunately, a recession is something beyond our control, but what we can control is how we respond and prepare for a financial recession. Taking precautionary measures to protect your finances can make a world of difference, so before the next financial downturn hits, make sure you take some or all of these steps to recession proof your finances.
Save an Emergency Fund
When the economy starts to dip, our jobs and our income can be put in jeopardy, and it’s for this reason that saving an emergency fund is crucial when you prepare for a recession. In a nutshell, an emergency fund is the money you’ve saved up for the sole purpose of helping you get through your day to day living during financial hardships.
Whether your hours have been cut back, you’ve lost your job, your business isn’t making any money, or you made some poor financial decisions, emergency savings will give you a safety net to fall back on so you can ride the wave and emerge from the recession back on your feet.
Establish a Budget and Pay Down Your Debts
Carrying a debt burden is exactly that: a burden. And, during a recession when jobs are scarce and money is tight, those high debt payments will add only more stress to an already stressful situation. So it’s time to take stock of your financial situation and all your payment obligations, and to make a plan to pay down your debts.
During a recession it can be difficult to cover day to day expenses let alone debt repayments – and this can cause your debt to spiral out of control. Carrying high levels of debt is very risky, because a slight change in external factors could affect your ability to pay your debt.
Although you may be able to manage payments now, a job loss or an interest rate hike combined with banks tightening credit limits could change that for the worse.
Downsize to a More Simple Lifestyle
Downsizing and learning how to live frugally can be a great strategy because if you can learn to make do with less, you’ll increase your savings and you won’t find yourself struggling to adapt to a new lifestyle when a recession hits.
Living frugally isn’t as difficult as it sounds, and contrary to popular opinion, a frugal lifestyle isn’t about pinching pennies and depriving yourself of things that bring you joy. Rather, it’s about making conscious spending choices that reduce expenses, with minimal impact on your lifestyle.
There are lots of ways you can start living frugally. If your family has two vehicles, consider reducing it to one and making use of public transit. This choice alone could save you $9,000 per year. Or, if having two cars is necessary, consider selling one of the cars for a more fuel-efficient subcompact vehicle to save on the cost of gas. You can also look into downsizing your home or apartment, spending less on groceries, and scaling back on your cell phone plan.
Diversify Your Income
Relying solely on a particular job for all your income has inherent risk, because if the economy tanks and you lose your job, you’ll also lose your only income and your ability to meet all your financial obligations. Having multiple streams of income can really help. If one income source starts to dwindle or gets eliminated completely, you have other sources to fall back on to help keep you afloat.
Diversifying your income doesn’t necessarily entail getting a second job – in fact if your spouse is working in a different industry than you, you have some income diversity right there. However, if you’d like to stretch your wings and bring in some more income you can look into many different options such as renting out a room in your home, renting out a space in your garage, or going so far as to buy a revenue property and rent it out.
If you have a fairly flexible schedule you can consider getting a weekend job, and if you have a particularly strong skill set or are developing one, you can look for ways to cash in on those skills.
Diversify Your Investments
In addition to diversifying your income, it’s also important to diversify your investments. Go through your investment portfolio and make sure your investments are spread out across different industries and even different types of assets so that when the market tumbles, your investments won’t be as affected and your losses won’t be as deep.
When it comes to diversification, you can park your money in a number of different investment vehicles. Real estate, whether it’s buying a home, a condo, or even land is a common investment that generally appreciates with time.
Investing in stocks, especially the stock market index is a good way to help your portfolio grow, while bonds have often been a good way of bringing in income. You can also consider international investments, as diversifying into other countries can also help to reduce your vulnerability to an economic downturn.
