There’s one thing that separates those with good financial health with those with poor financial health – preparation.
While there’s no crystal ball, financially savvy people are prepared for what could come in the future and have a plan in worst-case scenarios.
A growing worry for people around the world is that we may be heading into a recession.
It’s been over a decade since the 2008 financial crash hit. While we’ve seen positive economic growth since then, a series of factors including the COVID-19 pandemic has experts warning of a looming recession.
So what can the average person do to prepare?
What is a recession and why should we prepare?
A recession is a period of economic downturn that occurs when a combination of factors align such as high unemployment, a decline in GDP, and trade and industrial activity decline. For a downturn to be classed as a recession, there must be six or more consecutive months of economic decline.
From the 2020 pandemic, there have been worrying signs of a returning recession. Layoffs during the lockdown and a slow recovery in some sectors are starting to turn around, but is it enough?
While there are claims that we’re already in a recession, it’s still debated. We don’t know if a recession is coming, but it’s fair to say that preparing for one is a wise move.
What to do to prepare for a recession
Reassess your household budget
Step one in preparing for a recession is to reassess your household budget. The main question to ask yourself is: are you living within your means or are you stretching yourself?
Living within your means and having money left over to save is the best position to be in to weather the storm. See if you can make savings on your household bills, cut unnecessary expenses or look for free or cheap alternatives.
Prioritize your emergency savings
Emergency savings are vital in a recession and can help you overcome bumps in the road such as sudden job loss, income decreases, emergency repairs, or medical bills (that might be tough to afford if your budget is tight).
Try to reduce debt
Debt in a recession is just another black hole for your money to disappear into. Ideally, you want that money to go into savings or other important expenses. If you are able to, consider increasing monthly payments (to a comfortable level) to reduce any debt you have faster. Once you’ve cleared that debt, you can free up the cash to put into savings.
Think about extra income potential
If you have a skill that you’re not making use of. One way to earn extra income is to start a side hustle. The main benefit of this is that you diversify your income streams, which gives you better protection in the event of a recession. Common side hustles include copywriting, graphic design, homemade/personalized crafts, or consultancy work.
Alternatively, you could look into reskilling for a career change (to one that’s more recession-proof) or to advance in your current career.
What to avoid in a recession
An economic downturn affects house prices and stock prices. If you are an investor in the stock market, it’s easy to panic at the first sight of big dips. However, if you have a balanced portfolio, you should avoid panic selling if you can, as this will usually result in a loss.
The same goes for your home. If you can keep hold of it and manage monthly repayments, it makes more sense to avoid taking a loss to move somewhere cheaper.
This will depend on your personal circumstances, of course. In some cases, it may be unavoidable if you need to free up the cash.
Big expenses or debt
A recession is not an ideal time to make big purchases, like, buying a brand new car or taking out a huge loan. Those purchases will only put increased strain on your household budget and should be avoided.
Avoid being a cosigner
Cosigning on someone else’s debt, for example, a mortgage, is best avoided. If the borrower can’t keep up with repayments (e.g. due to sudden job loss), that responsibility will fall on you which will increase pressure on your finances.
Stay calm and plan ahead
While a recession is certainly worrying, the best thing you can do is remain as calm as possible and plan ahead. Being more conscious about your spending, clearing debt, and boosting your savings puts you in a much stronger position to ride any economic downturns. If you have done everything you can to prepare for a recession and find that you still need money today, apply for an online loan from Jora Credit. It’s a simple application with a decision in minutes and funding as soon as today. Get started here.