Without being too negative, here are the things that will happen during a recession:
- Increase in unemployment
- Pay cuts
- Rise in poverty
- A drop in asset prices
- Widening of the wealth gap
With these items listed out, the echo of the word ‘recession’ does incite an unsettling feeling among the working-class. Not just that, as humans, we cannot predict when recession comes, just that it will come at some point. However, the good news is that we can start preparing for it as soon as possible.
If this period of economic downturn turned out to be years away, great!
If it turned out to be the next few months, we’re at least half prepared for it.
Let’s dive in.
1. Start building your emergency fund
Naturally, the first step to being financially sound is knowing that you’ll be safe for at least three to six months if absolutely everything decides to go wrong.
The core of an emergency fund is giving you peace of mind that you’ll be safe for at least a few months. Expound it as the money that you set aside to use only in times of financial distress.
Obviously, the more money you can park in your emergency fund, the longer you’ll have. That’s taking into account that it will be much tougher to find a job after getting laid off because of recession.
2. Establish a budget
Downsizing your lifestyle and living more frugally could be a challenge to some individuals, but it is a super-effective way to either build that emergency fund or increase your investments.
It’s much less about pinching every single penny and constraining yourself to the joys of life. Rather, it’s more about being conscious when you spend and cutting back on those unnecessary purchases and subscriptions that siphon your money away every single month.
It won’t even impact your lifestyle that much.
3. Get out of debt
Being in debt is a burden. There’s simply no other way to put it.
On top of that, if you’ve just lost your job in a recession, these debt payments will only add even more stress to the already taxing efforts to survive.
Going off track to speak a little about personal finance, getting out of debt as soon as you can save you A LOT of money in interest payments! Almost every financial advisor in the world will tell you that getting out of debt always comes before thinking about investing any of it.
4. Diversify your income
If you have expertise that you can offer to the world, start building on that! It could be dropshipping, being a freelancer, or even a virtual assistant.
Although the income you’ll get from starting this side hustle will be minimal in the beginning, over time, it will help you to realise that you don’t need to rely on one source of income to survive.
For example, during the MCO lockdown, most of the working class is forced to stay in their homes. And because of that, those who need to physically be at work got their paycheck severely halved.
Having a side income is not only to pad the wallet during ‘normal periods’, it’s about having a safety net and knowing that you won’t be in trouble if one falls through.
5. Diversify your investments
On top of needing to diversify the income, it is also crucial that you start diversifying your investments. If you have all your funds invested in only one type of asset, an economic downturn in that certain market could potentially become a disaster for you.
The adage “Don’t put all your eggs in one basket” rings especially loud on this one.
Assuming that whether you invested everything in stocks or if you had diversified, your returns remain 10% per annum. However, if you had diversified, the impact of one market crashes is much lower. In this case, would you rather have diversified or not?
Of course, in real life, the numbers might vary. But it is ultimately better to have diversified and have a slightly lower return than risking everything on one type of asset.
6. Consider a recession-proof job
Recession-proof jobs are the jobs that will still be there regardless of what is happening in the economy. For instance, healthcare workers, teachers, IT professionals, utility workers, accountants, and more.
The fact is that during a recession, very few job sectors remain together. There will be either pay cuts or layoffs. While there are no 100% guaranteed recession-proof jobs, these few industries do seem a lot safer than others.
For more money-saving and finance-related tips, you can read the following articles below. Enjoy!