Many people are talking about the likelihood of a recession, and according to some metrics, we may already be in one. For anyone who lived through the fear and uncertainty of the 2008 financial crisis, hearing ‘recession’ from news anchors and pundits can bring up anxiety and fear.
Although it may be some time before we’re officially declared to be in a recession, preparing mentally and financially may ease any fears you’re facing. Having a plan in place can also help you find some silver linings and free your mind to see some of the opportunities a downturn can present.
Listen to this week’s episode of the rich & REGULAR podcast as we discuss recessions, and keep reading for some ways to prepare for the worst, even as we all try to expect the best.
What is a recession?
A recession is a period of economic downturn spread over time, usually a few months to a few years. The most recent recession was in 2020 and only lasted a couple of months, whereas the 2008 recession lasted about 18 months. We won’t know we’re in a recession until there have been at least two consecutive months of negative GDP growth.
Recessions are a natural part of the economic cycle and help to reset the economy when it grows too quickly, making it harder for regular people to purchase everyday items. As of August 2022, the economy has already seen two months of negative GDP growth, but the National Bureau of Economic Research (NBER) hasn’t officially declared one yet. While we wait for an official declaration, there are several ways to better weather any financial storms on the horizon.
It’s tempting to feel anxious about the future and prepare for the worst-case scenario as you listen to the evening news. Many of us who entered the workforce—or tried to—in 2008 remember the feelings of despair and hopelessness. Looking back at that time can give you cold chills, but remember that now is not the time to panic.
Instead, consider the things in your control and don’t worry about the rest. The stock market will do what it will; you’re better off taking a deep breath and keeping your money where it’s at. Trying to time the market by selling funds before a significant drop is a recipe for problems, and you may miss out on substantial gains as the market rebounds.
Instead of watching what the market does daily, spend some time tending to your finances so you know where you stand. Start to consider a plan to help you face an economic downturn. That way, when you’re confronted with hard times, you don’t react from an emotional place—you already know what you need to do and can get busy implementing it.
As part of your financial plan, consider the following:
Review your finances
Start by reviewing where you stand financially to get a clear overall picture of your financial life. Some critical questions to ask yourself include:
- How much cash do I have readily available (i.e., checking accounts, your emergency fund, or other savings accounts)?
- How much cash can I quickly access if needed (i.e., brokerage accounts, selling a second car or hobby equipment, potentially downsizing, etc.)?
- How much debt do I have (credit cards, student loans, car loans, mortgages, etc.)?
- What are my basic monthly living expenses (including food, shelter, health insurance, utilities, phone, transportation and childcare)?
- Where can I cut back on the rest of my spending if it becomes necessary?
- Am I anticipating any major life events with significant expenses attached (like a new baby or retirement)?
Beef up your emergency fund
Hopefully, you have a well-endowed emergency fund or are working on building it back up after major expenses drained some of it. Having a solid cushion to fall back on if you lose your job or experience a salary reduction can help you avoid going into debt and offer you peace of mind when listening to grim economic news.
If you have high-interest debt, try to pay it off and build an emergency fund simultaneously. Although it’s an extra challenge, and both may take more time, wiping out as much of your credit card or auto loan debt as possible while building a savings account can help you avoid going further into debt if layoffs become more frequent.
Consider your skills and upskill
Many wait until after a job loss to sharpen their existing skills or reach out to their network. Instead of waiting, look into places where you can improve your performance at your current job and position yourself favorably for positions in the future.
Refresh any connections you’ve lost with coworkers, mentors or other professionals, especially if they are outside your current company or industry. It’s a good idea to know people outside your primary industry to help you pivot if one sector gets hit particularly hard during a downturn.
If you’ve thought about freelancing, but haven’t done anything yet, now is a great time to get established. Even though finding the time may be difficult, you’ll be glad you started now. An extra income stream can help you pay off debt faster and help you breathe a little easier if you’re worried about layoffs.
Although talk of a recession leads to uncertainty about the future, remember that you’ve been in rough places before and that panicking doesn’t help the situation. Focus on things you can control, like paying off debt, building emergency funds and increasing your skills.
These are great things to do even at the best of financial times and can offer you some peace of mind when things get rocky.