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How to Prepare for a Potential Recession

A recession looks inevitable, but the extent of it is still unknown. Learn about how you can best prepare for it, personally and financially .
How to Prepare for a Potential Recession

With the ongoing COVID-19 pandemic, a lot of people are bracing themselves for an upcoming recession.

While stock markets had been on a record run and unemployment levels were extremely low across the United States before the outbreak of the virus, everything has now changed in just a matter of weeks.

A recession looks inevitable, but the extent of it is still unknown.

This is why you need to be fully aware of what might happen in the coming months and years. You can then learn about how you can best prepare for it.

The Chances Of a Recession Happening

While the good times don't last forever and downturns are a natural part of the economic cycle, the ongoing pandemic has blindsided most governments, businesses and people.

This was what many experts call a ‘black swan event’. This is an event that comes out of the blue and that cannot be planned for. Examples of a black swan event include a natural disaster or in this case a contagious virus.

Nearly all aspects of the business cycle are facing disruptions. This causes massive strain on businesses and workers.

Across the country, only essential businesses, for the most part, are able to stay open to the public. Therefore, countless businesses have been forced to shut their doors while their expenses remain high. They need to still meet rent payments on these promises, as well as pay their staff.

Strains on Households

The US government is stepping in to help businesses pay their workers and to provide stimulus payments to people. However, this will likely not be enough to stave off mass unemployment.

These measures may work for a few weeks, but restrictions are set to be in place for a long time to come. As a result, it is likely that a lot of businesses will run out of money and have to declare bankruptcy. This will leave a lot of people unemployed.

US initial jobeless claims

As people are more protective of their money in these uncertain times, consumer spending will take a massive hit despite most businesses trying to maintain their operations online.

A lot of homeowners will see a strain on their finances due to job and salary cuts.

This could lead to people struggling to meet mortgage repayments and the likes. All of these different variables feed into the success of the economy. With so much strain, a recession looks almost inevitable. The big question is how severe and how long this recession may last.

Uncertain Times Ahead

Some analysts believe that it will be worse than the Great Depression, whereas others believe that it will be a short-lived recession and that it won’t take long for people and businesses to get back to normal.

Everything depends on how well the authorities across the US deal with the crisis. It also depends on how well citizens adhere to the precautionary measures to try to weed out the virus.

The development of a proper vaccine would certainly get things going again a lot quicker. However, despite dozens of parties working on a vaccine, there may not be one on the horizon for many months.

As a result, it is vital that people prepare themselves for an upcoming recession. It is usually best to prepare for a worst-case scenario. While hopefully this situation does not come to bear, you will be in a much better position if it does and you have taken the necessary precautions.

There are a number of aspects of your life that are important to consider when preparing for the onset of a potential recession.

You want to ensure that you tick all of these boxes in case the worst eventuality occurs.

1. Personal Preparation

The first thing to consider is how your personal circumstances may change as a result of a recession.

You will have to analyze your job and carry out a risk assessment.

This will allow you to figure out how likely it may be that you will lose your job, have your hours cut or be subject to a decrease in pay.

Those In Employment

For those who have employers, it is a good idea to figure out what implications an extensive pandemic shutdown and subsequent recession would have on the core business.

Some of the important questions to ask yourself include:

  • Does the business have enough cash reserves to meet its obligations?
  • Will there still be sufficient demand for the product or service during a recession?
  • Is it likely that the business may look to cut hours or jobs?
  • How will the industry as a whole be affected?
  • Is your current job vital to the business or is it expendable?
  • What voluntary redundancy package would you be entitled to?

These are just some of the questions to ask yourself as they will give you a clearer idea of how a recession might impact your job. Resulting from the answers, you can start to develop a plan for the future.

You may look at other job opportunities in the same or a parallel field. There may be an opportunity for you to shift your focus to an industry that is less sensitive to a recession.

Those Who Are Self-Employed

If you are self-employed, then there will be a different set of questions that you will have to consider.

At the best of times, it can be stressful and uncertain when you work for yourself, doubly so if there is a recession on the horizon.

Some of the key questions to ask yourself in this case include:

  • Will there still be a demand for the goods or services you provide during a recession?
  • Will you be able to keep paying all your staff if a recession hits?
  • Is there a way you can pivot your business to make it less sensitive to a recession?
  • Is there a way to decrease the risks of your clients or customers not paying their obligations?
  • Would it make sense to seek employment instead of being self-employed during a recession?
  • Does your business have enough cash to meet its obligations in a recession?

These are just some of the questions to ask yourself if you are self-employed. If you have a family, your priority will most likely be to ensure that you can keep a roof over their heads and food on the table.

Oftentimes, a partner may have to go back to employment so there are two incomes coming into a household. Someone may have to take up a second job to supplement a potential loss in income from their business.

Those Who Are Unemployed

If you are currently unemployed, then there will be a lot of uncertainty that you have to deal with. It is important that you are availing of any unemployment benefits that you are entitled to.

You should also answer these questions:

  • What industries would be hiring during a recession that are relevant to your experience?
  • Can you upskill while looking for a new job?
  • Can you work part-time while you look for a new job?
  • How can you get your foot in the door in a certain company you want to work for?
  • Is it time to adjust your monthly budget or create one?

Naturally, people will be in different situations when they are unemployed. Their spouse may be working or they may be the only breadwinner in a family. Alternatively, you could be living on your own and have to fend for yourself.

There are a lot of important questions to ask yourself. It is better to answer them well in advance instead of waiting for the worst eventualities to happen and not being properly prepared.

2. Preparing Financially

It is important that you prepare yourself as best as possible in a financial sense for an upcoming recession.

While everyone's circumstances will be different, there are a few key tenets that people should adhere to in nearly all situations.

Emergency Fund

The first tenet is the importance of having an emergency fund. This is money you have set aside that you can use in times of emergency. If you end up losing your job, this will give you enough money to live on for a period of time without having a job.

As a general rule of thumb, you should aim to have at least six months worth of living expenses in your emergency fund. It should be easily accessible and you should not touch it unless there is an emergency.

Minimizing Debt

The next step to prepare for a recession is to try to minimize your debt as much as possible. This means paying off credit cards, car loans and the likes.

This will take some pressure off you if a recession begins and your paycheck starts to get squeezed.

Managing Retirement And Investment Accounts

For your retirement accounts, if there is a recession on the horizon, you may want to take a more conservative approach. This could see you moving away from volatile stocks and riskier types of investments.

Your age plays a factor, as people will tend to take a more conservative approach to investing as they get closer to retirement age.

Younger people can afford to ride out bouts of volatility as they have a long way to go before retirement.

You may want to hold more funds as cash and in defensive stocks. Having cash on hand in your retirement or investment accounts can help you benefit from opportunities in the stock markets when the recession takes hold and stock prices plummet.

Managing Your Mortgage

Finally, if you have a mortgage, you may be able to work with your mortgage provider to restructure your monthly payments. This could take some pressure off you if you are seriously struggling to meet repayments each month.

Financial institutions will usually work with you if you are making an effort to meet your debt obligations and your repayment track record to date has been good.

The overriding principle when managing your finances in anticipation of a recession is to take a more conservative approach, with having easy access to funds if needed and having minimal debt.