A recession can affect your everyday life and budget, but there are things you can do to prepare yourself. As of June 2020, the COVID-19 pandemic showed the possibility of a recession. 33 million unemployed Americans asked about unemployment benefits. During difficult times, it is normal to be concerned about your lifestyle, career, and budget. Even if things improve and there is never a recession, practicing responsible money habits can only lead to success.
Start by implementing healthy budgeting habits to prepare for financial opportunities or emergencies. Before we dive into preparing for a recession, let's look at what typically happens in a recession.
What is a recession?
A recession is an economic downturn that occurs during a period when unemployment is rising and commercial and industrial activity is falling. While it can vary, a recession typically refers to six or more consecutive months of economic decline. This means that a country's gross domestic product (GDP) will decline for two consecutive quarters, which indicates slower or negative economic growth.
After an 11-year period of economic growth in the US, the COVID-19 pandemic recently caused a downturn and sparked fears of a recession. While these last few quarters have been in the red, the US economy is expected to see an upturn towards the end of 2020.
Recession vs. Depression: What's the Difference?
A recession and depression are often confused. Think of it this way: a recession is a short-term regional economic downturn, while a depression is a more severe long-term regional or global economic downturn.
A recession shows a negative turn in the economy, mainly affecting employment and production. This means that the average household income and spending across the country is falling. In a recession, these spending patterns last for six months and up to 3.5 years in a country. In the event of a recession, your family could withhold large purchases such as buying a new car or house.
A depression is a widespread rise in unemployment and disruption in economic activity in one region and can even spread worldwide. This includes a decline in the movements of construction, world trade and capital, which affects the business cycle for three or more consecutive years. For example, the Great Depression lasted almost a decade with continued negative growth around the world. During this time, many families were unemployed for years.
Given the different effects of an economic downturn, each type can adversely affect your lifestyle. Not knowing the length or long-term effects of a recession or depression can increase your anxiety. To stay one step ahead of financial emergencies, it is helpful to always be prepared. In the following sections, read about what usually happens during a recession and how to prepare.
What usually happens in a recession?
During a recession, nationwide household and business spending are limited for two or more quarters of the year. During this period, the decline in spending resulted in large-scale layoffs and rapidly rising unemployment. These changes are typically made in a given country for months to several years.
How to Prepare for a Recession
Whether or not a recession is approaching, there are ways to plan your budget for economic change. Building your savings, re-evaluating investments, and managing debt are all important ways to stay ahead of unexpected events. Always have your budget ready with our tips.
1. Check your budget monthly
Assess your budget each month to see what expenses could be marginalized. Do you spend too much on clothes? Cut them out. Buy only what you need and opt for generic over branded products to save a few extra dollars.
2. Contribute more to your emergency fund
After saving unnecessary expenses, increase your savings budget as much as possible. Ideally, 20 percent of your income should go towards your savings and 30 percent towards “extra” expenses like your subscriptions and memberships. After reducing your additional expenses, set up higher automatic payments to your emergency fund. If you lose your job or have problems with your car, your emergency fund is at your disposal.
3. Focus on paying back high yield debt accounts
Track every debt account you have with our app to see how much you owe and what interest rates you have. Focus on getting more of your income into debt with the highest interest rates. When doing this, consider paying off tax-deductible debt accounts, such as student loans, to get cash back during the tax season.
4. Keep up to date with your usual posts
Whether you already have a 401k set up or not, try to stick with your budgeted contributions. It can be intimidating to invest money while a recession is looming, but if you keep up with them, you can get long term benefits. During inconsistent times, avoid checking your performance every day to keep track of your future goals.
5. Evaluate your investment decisions
Avoid emotional money decisions whether your investments are going well or not. When the market worsens, consider it for upswings. Check with a trusted financial advisor before making any major changes.
6. Build skills on your resume
Use free online learning platforms like YouTube, expert guides, LinkedIn courses, and reviews to improve your resume. Show your skills in meetings to show your employer your worth. Add any certificate you earn along the way to your resume – this will help you prove your willingness to learn. Increasing your skills could, in turn, increase your worth and your earning potential.
7. Brainstorm Innovative Ways To Make Extra Money
Regardless of whether things are nearing a recession or not, you should start a passion project for some extra income. Invest time creating an e-book, online course, or blog for a skill you master and which can generate passive income. Deposit your secondary income directly into your savings account to receive an additional financial cushion.
8. Prioritize online and personal network events
Master your digital and personal networking skills by attending networking events every month. Meet with industry professionals to offer your skills, learn from them, and build long-term business relationships. In the future, these connections could open up career opportunities or business consulting at an expert level.
Mistakes to Avoid During a Recession
During an economic downturn, avoid putting your finances at risk and prepare for emergencies. Here are some common mistakes you want to avoid:
panic: Avoid fear. If sudden changes cause anxiety, take a deep breath and see if there is an upswing shortly thereafter. If you are unsure about economic changes, consult a financial advisor.
Increase your debt: While recessions can lower the interest rates on credit, avoid taking on more debt. Instead, focus on paying off existing debts.
Become a co-signer: If the principal debtor is unable to make payment, the co-signer will be held responsible. Avoid cosigning to avoid incurring more potential debt.
Take your job for granted: Whether you want to stay at your workplace for a while or not, always show your skills. During an economic downturn, highlight these skills and postpone the process until you have another opportunity.
Do not set up an emergency fund: You may need additional income for daily needs and unexpected events. Build your emergency fund so you can cover at least three to six months of your expenses.
Take on more fixed costs: Focus on lowering your overall costs. Evaluate what you can cut from your budget and avoid adding to your fixed costs, e.g. B. a new car payment or an expensive apartment.
No backup plan: First of all, create a budget that suits you and adjust it. Update your resume, save extra money, or start a sideline for extra security in case things take an unexpected turn.
Regardless of the economic climate, implementing these healthy financial strategies can help improve your budget and improve your opportunities. The best way to grow your savings and prepare for unexpected events is to track your budget, adjust it frequently, build your emergency fund, and look for ways to enhance your experience. Grow your savings accounts and career while practicing good financial habits.
swell: Merriam-Webster 1, 2 | Visual capitalist