How to Prepare for a Recession
Are You Prepared for a Recession?
What are you going to do when you get laid off? How will you pay for rent and bills?
What about if your investments tank? Do you have enough cash to get by?
Don't wait until a recession hits to ask these questions. Get prepared now. And if financial hardship is already on you then run through this guide and get ready.
Action List to Stay Prepared
If you practice good financial habits all the time, then when a recession or layoff comes it will be easier to weather. The basic idea is to not over extend yourself. Then you can be better prepared for whatever the economy throws at you.
Here is the action list I use no matter the state of the economy or my bank accounts:
- Don't take on any high-interest debt (i.e., credit card bills).
- Pay down debt as quickly as is comfortable.
- Know monthly expenses and plan for incidentals (car maintenance, occasional health care, etc.).
- Have a three-month emergency fund.
- Keep your professional network active.
- Update your resume annually.
How you organize your finances may vary, but the general principles of not living beyond your means or getting too comfortable in your job are the same. It's easy to get complacent during good economic times.
You want to work towards getting yourself established with a manageable monthly budget and options if things take a bad turn.
Recession Action List
When the economy takes a downturn or is down long enough to be called a recession it calls for more drastic action.
When the economy as a whole is suffering there a few things you can do to prepare your finances. The time before the poor economy affects you and your family is the time you should use to get ready. The focus is in setting aside a little more cash and expanding your career options if you need to get a new position.
- Do not make any big purchases that require financing (ie house, car)
- Stop excess payments above the minimum
- Analyze monthly budget and cut back on extras
- Save up cash for a 6-12 month emergency fund
- Update resume and actively look for new positions
- Tune into employer's finance and staffing trends
- Consider additional employment (more hours, contract work, spouse job)
I don't make any big purchases and I also cut back on the recurring expenses like subscriptions and luxury items. This allows me to save up more cash than I normally have until I can cover at least 6 months of living expenses. This is a lot of money but I know it can take a while to find a new job in a recession so I want to make sure I'm ready.
When I see the economy slowing down it's time to get my resume up to date. Look around and apply for positions you're interested in. It'll give you practice interviewing and will get your name out there so if a lay off is in your future you'll already have the process started.
Layoff Action List
Getting laid off might be one of the most frightening experiences to happen to you. It will be less stressful if you have an action plan prepared.
Here is what I recommend, you should review it and adjust for you:
- Ask lenders to defer payments, especially for student loans.
- Look at monthly budget again and cut down to the essentials.
- Plan out how you will use your emergency fund.
- Focus on your job search and reach out to your contacts.
- Apply to "fall back" positions for lower paying/part-time work.
Your primary focus during this time will be to find a new job. But that can take time, especially in a recession. While that's in the works, do what you can to cut back on expenses.
Also, it's a good idea to have an employment backup plan. Look for a way to bring in some income so you're not pulling from your emergency fund as quickly. This can be part-time or contract work with skills you have at your regular job.
Now that you have an idea what should be in your action list for good economic times, a recession and a lay off let's look at the details. Each financial area is laid out below with ideas of how you can build your own recession survival guide.
Take a good look at what you're spending money on each month. How much of it is required for a basic standard of living and how much can you do without? You don't have to cut the luxury items when things are good but be aware of what is first on the chopping block when things turn bad.
Low Interest Debt: Minimum Payment
When you're doing well you might be paying extra towards your low interest debt like car payments or mortgage. This is part of a solid financial strategy when you have extra income. It's also one of the first levers you can pull when your income becomes uncertain.
Start With the Biggest
Of course you should cut things like an extra streaming subscription or the gym membership you never use when things get tight. But with the threat of a recession or when you're laid off it's more helpful to focus on the biggest expenses.
The biggest monthly expenses are usually housing, cars, utilities and food. These can seem like the most difficult to change but they're worth thinking about before a recession hits.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2020 Katy Medium