A recession can impact your everyday life and budget, but there are things you can do to prepare. As of June 2020, the COVID-19 pandemic showed a possibility of a recession, with 33 million unemployed Americans inquiring about jobless benefits. During tough times, it’s normal to feel anxious about your lifestyle, career, and budget. Even if things improve and a recession never comes, practicing responsible money habits can only set you up for success.
Start implementing healthy budgeting habits to prepare for any financial opportunities or emergencies. Before diving into how to prepare for a recession, let’s review what typically happens in one.
What Is a Recession?
A recession is an economic downturn that occurs over a period of time where unemployment rises, and trade and industrial activity decline. While it can vary, a recession typically refers to six or more consecutive months of economic decline. This means a country’s gross domestic product (GDP) declines for two back-to-back quarters, signaling slower or negative economic growth.
After an 11-year economic growth period in the U.S., the COVID-19 pandemic recently caused a downturn, sparking fears of a recession. While these last few quarters were in the red, the U.S. economy is projected to upswing towards the end of 2020.
Recession vs. Depression: What’s the Difference?
A recession and depression are commonly 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, primarily affecting employment and production. This means the average household income and spending decreases across a country. In a recession, these spending patterns continue in one country for six months and up to 3.5 years. In the event of a recession, your family may hold off on making any large purchases, like buying a new car or house.
- A depression is a widespread increase in unemployment and a pause in economic activity across a region, and it can even spread globally. This includes a decrease in construction, world trade, and capital movements affecting the business cycle for three or more straight years. For instance, the Great Depression lasted almost a decade with ongoing negative growth across the globe. During that time, many families were unemployed for years on end.
Given the different ramifications of an economic downturn, either type can be detrimental to your lifestyle. Not knowing the length or long-term effects of a recession or depression may increase your anxiety. To get ahead of financial emergencies, it’s helpful to always be prepared. Read what normally happens during a recession and how to prepare in the sections below.
What Typically Happens in a Recession?
During a recession, countrywide household and business spending are restricted for two or more quarters of the year. During that time, the decrease in spending leads to large-scale layoffs and rapidly increasing unemployment. These changes generally carry out in a given country for months to a few years.
How to Prepare Yourself for a Recession
Whether a recession is approaching or not, there are ways to plan your budget for any economic changes. Building your savings, re-evaluating investments, and managing debts are key opportunities to get ahead of any unexpected events. Always keep your budget prepared with our go-to tips below.
1. Reassess Your Budget Monthly
Evaluate your budget every month to see what expenses could be kicked to the curb. Are you spending too much on clothes? Cut them out. Only buy what you need and opt for generic over name-brand products to save a couple extra dollars.
2. Contribute More Towards Your Emergency Fund
After cutting out unnecessary expenses, increase your savings budget as much as you can. Ideally, 20 percent of your income should go to your savings, and 30 percent to “extra” expenses like your subscriptions and memberships. After slimming down your extra expenses, set up higher automatic payments to your emergency fund. If you lose your job or have car troubles, you’ll have your emergency fund there to help out.
3. Focus on Paying Off High-Interest Debt Accounts
Track each debt account you have using our app to see how much you owe and your various interest rates. Focus on contributing more of your income to debt that holds the highest interest rates. While doing so, consider paying off tax deductible debt accounts, like educational loans, to get cash back during tax season.
4. Keep Up With Your Usual Contributions
Whether you already have a 401k set up or not, try to maintain your budgeted contributions. It can be intimidating to put money in while a recession is looming, but keeping up with these can benefit you in the long-term. During volatile times, try to avoid checking your performance each day to stay at ease with your future goals in mind.
5. Evaluate Your Investment Choices
Whether your investments are doing well or not, avoid making emotional money decisions. If the market takes a turn for the worse, consider riding it out for any upswings. Reach out to a trusted financial advisor before making any huge changes.
6. Build Up Skills On Your Resume
Use free online learning platforms like YouTube, expert guides, LinkedIn courses, and assessments to boost your resume. Show off your skills during meetings to show your employer your value. Add every certificate you earn along the way to your resume — this will help prove your eagerness to learn. Increasing your skills could, in turn, increase your value and earning potential.
7. Brainstorm Innovative Ways to Make Extra Cash
Whether things are heading towards a recession or not, consider starting a passion project to bring in supplemental income. Invest time in creating an ebook, online course, or blog on a skill that you’ve mastered and could use to earn passive income. Directly deposit your side hustle earnings into your savings account for an extra financial cushion.
8. Prioritize Online and In-Person Networking Events
Master your digital and in-person networking skills by attending networking events each month. Meet with industry professionals to offer your skills, learn from them, and establish long-lasting business connections. Down the road, these connections could open up career opportunities or expert-level business advice.
Mistakes to Avoid During a Recession
During an economic downturn, avoid putting your finances at risk and prepare for any emergencies. Here are some common mistakes you’ll want to avoid:
- Panicking: Steer clear of fear. If sudden changes spark anxiety, take a deep breath and see if there’s an upswing shortly after. If you’re unsure of any economic changes, reach out to a financial advisor.
- Increasing your debt: Even though recessions may lower interest rates on loans, avoid taking on more debt. Instead, focus on paying off any debt you already have.
- Becoming a cosigner: In the event the primary debt holder isn’t able to make a payment, the cosigner is held responsible. To avoid taking on more potential debt, stay away from cosigning.
- Taking your job for granted: Whether you want to stay at your job for a while or not, always showcase your skills. During an economic downturn, highlight these skills and put off quitting until you have another opportunity lined up.
- Not building an emergency fund: You may need supplemental income for your daily necessities and unexpected events. Build up your emergency fund so you can cover at least three to six months of your expenses.
- Taking on more fixed expenses: Focus on decreasing your overall expenses. Evaluate what you can eliminate from your budget and avoid increasing your fixed expenses, like a new car payment or an expensive apartment.
- Not having a backup plan: First, create a budget that works for you and adjust as you go. Update your resume, save extra cash, or start a side hustle for extra backup opportunities in case things take an unexpected turn.
No matter the state of the economy, practicing these healthy financial strategies can help improve your budget and opportunities. The best way to increase your savings and prepare for unexpected events is to track your budget, frequently adjust it, build up your emergency fund, and seek opportunities to improve your experience. Level up your savings accounts and career while practicing good financial habits.