With a recession looming on the horizon—not to mention shrinkflation tricking you into paying more for less at the grocery store—it’s a smart idea to get serious about your finances. While it’s still unclear at this time how bad this economic downturn might get, you should still consider taking steps to protect yourself. Here’s what you need to know about surviving a recession.
What Is a Recession?
A recession is the finance term for a period of falling economic performance across all, or at least most, industries. The National Bureau of Economic Research is the organization with the official power to declare a recession, which it does when income, employment, retail sales, production, and real GDP decline over several months.
If you’ve lived through a recession before, then you know that one of the worst parts is the uncertainty. Will prices ever stop going up? People in the workforce worry about losing their jobs, while retirees worry that a volatile stock market could decimate their savings.
First, Don’t Panic
Although the details might be different each time, recessions are all essentially the same. According to Investopedia, “Recession is a normal, albeit unpleasant, part of the business cycle.” The Federal Reserve pushes back against a recession by increasing interest rates, but sometimes that’s not enough to cool down rising inflation.
The AARP reports that there have been 35 recessions in US history since 1854, but they’ve been spaced farther apart and shorter in duration after 1945. Although the average recession lasts just over 10 months, “[t]he recession of 1873 was the big daddy of misery: It lasted 65 months.” It’s not likely that this recession will last five and a half years, thankfully. The average length of a recession since 1990 has been just nine months.
There’s not much you, personally, can do to stave off a recession. Forces bigger than individual consumers are at work. However, there are steps you can take right now to protect yourself. Start by making a financial plan that emphasizes saving money, diversifying your income, and making wise investments.
Live Below Your Means
Now is the time to step up your budgeting game. If you don’t have a budget already, start one. If you have a budget but struggle to stick to it, sit down with your monthly spending and figure out what’s holding you back. Spoiler alert: it’s rarely a lack of willpower. Many people who struggle with budgeting set restrictions that are too tight, leading to inevitable failure. Others are not as mindful as they need to be about their spending habits.
A simple place to start is the 50/30/20 budget. In this common budget framework, you earmark 50% of your after-tax income for needs such as housing, utilities, food, and medicine. Next, you’ll set aside 30% of the money for wants—entertainment, travel, shopping, and so on. Finally, the last 20% should go to paying off debt and saving or investing.
If a recession happens, you might find that those percentages need to shift a little bit. The obvious place to cut is the 30% for wants but resist the urge to cut that category out entirely unless you have no other choice. You can cut back on basic living expenses by cooking less expensive meals at home instead of dining out and planning an “errand day” or two to cut back on gas usage.
Finally, make a contingency plan for if the worst happens. Hopefully, you’ll never have to use it, but it’s better to be prepared. If you lose your job, for example, it’ll be slightly less stressful if you already know how to file for unemployment. Worried that you won’t be able to pay your bills? Research organizations that can offer assistance before you need it.
Food insecurity is one of the scariest things you can face, especially if you have a family. There’s nothing shameful about applying for SNAP or WIC benefits to keep your household fed during tough times. Remember, you can access the internet for free at your local library. They may also be able to point you in the direction of other community resources that can help.
Focus on Saving and Paying Off Debt
As a recession looms, it’s more important than ever to bulk up your emergency savings fund. Of course, you need to have an emergency savings fund, to begin with. Ideally, you should have three to six months of your current wages stashed in a savings account. That will act as a safety net in case you lose your job during the recession.
Resist the temptation to spend your savings on non-essential purchases. Although rising inflation means that everything costs more right now, that’s not a good reason to plunder your own emergency fund. Instead, economize where you can and remember that economic downturns don’t last forever.
The absolute last thing you should do right now is to accrue more consumer debt. Your “emergency” credit card isn’t the safety net you think it is. As MyMoneyCoach explains, “Most don’t foresee the reality that they will need a larger income than they currently have to both repay the money (plus interest) that they borrowed during the rough patch.”
Although it might seem counterintuitive, try to pay off any consumer debts on your ledger as quickly as possible. The compound interest on those balances will keep ticking away, so you’re throwing away more and more money the longer you wait to pay them off. If it’s at all possible to accelerate your repayments on high-interest consumer debt, then go for it.
You can use the snowball method—paying off the smallest debts first and then applying those minimums to your bigger debts—or the avalanche method of targeting your highest-interest debts first with everything you’ve got.
Read More: Paying Off Credit Debt Quickly is More Simple Than You’d Think
Minimize Risk
Minimizing risk can take several different forms, depending on your current situation. For example, if you’ve been thinking about starting a new business or quitting your job without having another one lined up, now is probably not the best time. People on the cusp of retirement may also decide to stick it out for another year when a recession is looming.
If your current employer is in serious danger of triggering layoffs, however, you might consider circulating your resume. As Newsweek points out, “Try to gauge how vulnerable you are to a layoff in a recession. Ask yourself: How did your last performance review go? Are colleagues who you respect heading for the exits, indicating the company could be in trouble? Is your industry shrinking or heavily dependent on consumer discretionary spending?”
It’s also a good idea to focus on investments that are traditionally more stable. Investopedia warns that you should “avoid companies that are highly leveraged, cyclical, or speculative.” We’ve seen the truth of that warning as cryptocurrency—one of the most speculative and volatile investments on the market—has plummeted over the past six months. While Bitcoin has recovered from bigger drops before, there’s no guarantee that it’ll bounce back this time. If it does, you could see an incredible ROI. But if it doesn’t… well, you could be out a lot of money.
One word of caution: Think twice about buying the dip. What does that mean? “Buying the dip” is when an investor scoops up stocks that have dropped in value. The idea is that buying stocks during a bear market will result in a bigger-than-usual payoff once the economy recovers. That can be true, but it’s a risky practice. It all depends on how much you have to lose—and how close you are to retirement.
Diversify, Diversify, Diversify
There are two main ways you can protect yourself by diversifying in these uncertain economic times. First, if you have an investment portfolio, make sure that it’s built on a solid foundation. Let your 401(k) savings ride, and don’t cash out or make major changes to your portfolio based on temporary swings in the market.
Whatever you do, don’t sell stocks in a panic. Recessions come and go, and the stock market will rebound down the road. If you hold steady, your portfolio will eventually recover. If you sell while stocks are low, however, you’ll lose that money forever. One minor caveat, however, for people who have recently retired or plan to do so in the next year. Make sure that you have enough cash in hand to get through a full year of expenses.
The second way is to diversify your streams of income. Many Americans rely on a single source of income: their full-time jobs. But in times of greater economic volatility, there’s an increased chance that your income could go away overnight. Layoffs happen—especially during a recession. Look into ways that you can bring in additional income, even if those streams seem like they’re barely more than trickles. Having five different ways to bring in an extra $200 a month will still net you $1000.
