There is a widespread news that the recession will happen in 2023 and people all over the world are getting prepared for a recession. The major economies are working to beat it. Here is how to prepare for a recession and save yourself.
What is recession?
Recessions are substantial declines in economic activity that can last for several months or even years. When a country’s economy faces a declining gross domestic product (GDP), growing unemployment, declining retail sales, and decreasing income and manufacturing measures over an extended period, we call it a recession. Countries may fall into recession due to various reasons – Too much inflation, too much deflation, and economic shocks are some of the few reasons for it.
For instance, Inflation in the United Kingdom fell marginally in the August, but remained significantly above the Bank of England’s 2% objective. Core inflation remains at 6.3% on an annual basis. The Consumer Price Index rose by 8.6% in the 12-month period leading up to August.
A lot has changed since the beginning of the year, and we’ve been impacted badly in certain ways. This could get worse now that the UK will enter into the recession period by end of this year. But don’t sweat, we still have a few months to prepare. I was reading some articles on it and thought it would be worthwhile to share my thoughts and takeaways. The following are some suggestions from financial advisers around the world on how to prepare for a recession.
How to sustain a recession?
#1 Take a look at your finances and create a monthly budget
If you are worried about the economy right now, the first thing you can do is get familiar with your monthly budget. You want your income to last as long as possible in an emergency. Knowing how much money is leaving your wallet and where it is going can help you determine the best course of action for preparing for unemployment or any other emergency.
I would recommend you to spend a month or two analysing your finances and looking at your spending history and how it maps with your priorities. Budgeting is not a complex thing. Anyone can do it. To get started, here is a famous technique to create your budget. Use the 50/30/20 rule.
According to the rule, you should spend 50% of your income on necessities, 30% on wants, and 20% on savings. It is entirely up to you to allocate your spending within these categories according to your income and cost of living places. But there are no strict rules in budgeting as long as you satisfyingly spend money and you keep safe. I would also recommend you to evaluate your budget every six months or at least once a year to see how well you are sticking to it. You can adjust your budget to align the changes in your spending, lifestyle, and income.
#2 Limit your big expenses
You want your income to last as long as possible, especially in an emergency like this. Once you have calculated how much money you are spending, look for areas where you can cut back. Are you wondering from where? Well, you might have loads!! You can reduce the number of weekend dining, takeout, etc.
You can also focus on the streaming services you use by making it less or refrain from making any financial commitments. This might look like a small number, but you will end up with a staggering number which will useful in an emergency. Live a satisfying life while keeping your cash protected in time of needs.
#3 Pay down credit card balances
The other expensive corners in your budget could be high-interest, variable-rate debts. Given the rising interest rates and inflation, those balances are likely to rise further and become more expensive to carry. This is something you must not carry forward during this situation. I would highly recommend you to pay off your credit cards as early as possible and cut off the unused/unnecessary cards until you are back in a safe financial position.
When you have eliminated those high-cost expenses, you can prepare better for other things financially. Another best way to keep you safe from high interests would be going back to the basics. No idea? It’s CASH. Start paying with cash. It not only keeps you from accumulating more debt, but it can also help you spend less overall because the psychological act of handing over physical bills helps you spend less.
#4 Diversify your income
If you have a flexible schedule, consider getting a weekend job, and if you have or are developing a skill set, look for ways to monetize those skills. However, if you want to broaden your time and earn more money, there are numerous options available to you with the internet, and it’s even easier to start working. It can be your hobby or something new. I would urge you to go for it until and unless it doesn’t require any huge investments.
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#5 Create an emergency fund
Creating an emergency fund is the first and foremost step in the financial planning. Before you make any investments, you must set aside emergency funds. The emergency fund’s purpose is to provide a reserve for your finances during a crisis. It allows you to deal with any financial emergency without disturbing your investments, primarily set aside for your long-term needs.
To estimate the amount you need for an emergency, do the following:
- Estimate your monthly expenses, such as food, groceries, rent, other household expenses, your children’s school fees, fuel, internet, and other utilities.
- Next step would be on your loans, EMIs if any.
- Further step would on any insurance premiums you will have to pay in the next 6 months.
Calculate all these and the rest will give you the estimated emergency fund amount to put aside. You can put it in another savings account and keep it safe and refrain from touching the account.
I would recommend you to drop it in a vault on your bank. For instance, Revolut has a feature called Vaults which are interest-bearing vaults. As a result, the more you save, the higher your interest rate will be starting from 1.65% annual interest paid daily and goes up depends on the type of account you hold. Click here to read more and setup.
#6 Balance your investment Portfolio
During recessions, investment is what will save you from downfall. I am sure most of us will be waiting for the right time to invest in stocks, bank schemes, cryptos, or real estates etc. But it is recommended to keep the investment consistent rather than starting during a downturn, as the loss will be greater than in previous periods.
Investing in all these assets is a sure way to get returns, but first you need a strategy. The best strategy is to “balance your portfolio”. What does it mean? Balancing a portfolio requires leveraging both sides of the coin by considering both growing and protecting wealth assets in your portfolio.
- Growing wealth assets – Stocks, Cryptos.
- Protecting wealth assets – Real estate properties, Commercial properties.
During volatile market periods, when the market is falling, real estate will generate cash flows in the form of rent, and the rent will remain stable regardless of how much the real estate market value decreases. Once the market recovers, your asset price appreciates (stock price, crypto price) and increases your wealth, and you’ll receive cash flow in the form of dividends or you can call profit by selling your shares, real estate, etc. Either way, you are safe, and your money keeps generating cash flow.
When times are good, taking steps to prepare your wallet for a downturn can help ease some of the stress connected with recessions. Evaluate, analyse, plan your finances, and place your money safely where it can grow and multiply.
What are your comments on the above points? Please add your thoughts and suggestions in the comments below. Also, do check out other articles from JUST A LIBRARY – Click here.
I’ll see you guys in another article. Until then, stay tuned, stay updated!!