The economy always has and always will have its ups and downs. It's easy
to coast through the good times, but how do you come out of the tough
times unscathed? By preparing adequately, cutting costs, and making sure
you still have some income coming in, you can emerge out of a recession
just as strong as you were before it.
- 1Create an emergency fund. If you don't already have you an adequate emergency fund set aside, specify a goal for how much money you want to add to it every month. Your fund should be kept in a savings account with your bank.
- While normally, it's recommended that a two-income couple keep three months' worth of expenses in an emergency fund, during a downturn the recommended amount is six months' worth instead, especially if you're in an industry that gets hit hard by a recession (construction, financial services, food) and if you're a one-income family.
- Dual-income families may be safe with three or four months' worth.
- If you're self-employed, you should set aside up to a year's worth of expenses.
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2Pay off debt. You should always work to be debt free, but when a recession is coming it's even more important to do so. Focus first on paying off your debt with the highest interest rate, which is usually your credit card debt. From here, pay off debts with lower interests rates as you can, working to lower your debt as much as possible. Reducing your debts will lower your monthly expenses and give you a better chance of surviving a recession if you lose your job or need to cut down on spending.
- Money saved from not having to pay debt repayments can then be saved for your emergency fund or otherwise saved. Saved money can be invested in securities when their prices drop during a recession.
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3Create additional income streams. In a recession, there's always the chance that you might lose your job. Your primary focuses should be to keep your current job and be ready to enter the market again for a new one if you lose it (keep an updated resume, investigate job opportunities, etc.). However, you can also increase your financial security by creating separate income streams. These can be a second job, an online business, or any form of passive income.
- Even if you can only make an additional $500 or $1,000 per month, this extra income can help you get through tough time if your primary source of income dries up.
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4Diversify your investments. During a recession, stock prices will usually fall dramatically, which means your investment accounts could be hit hard. While many companies, and their stock prices, will recover out of the recession, some will enter default and cause you to lose money. You can reduce the risk of this happening by spreading out your investments. Think about buying bonds, investing in securities from other countries, or investing in precious metals. These investments, particularly the last two, may move independently of the market and can protect your assets in a recession.
- You can also look outside the market to invest in real estate, like land or apartments, that will usually appreciate in value over time, sometimes even through recessions.
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