Many of you may remember the Great Recession in the United States, which lasted from December 2007 to June 2009 and was known as the worst financial crisis in the United States since the Great Depression in the 1930s. For many, this was a time of uncertainty, stress, fear, depression, anxiety, and countless other emotions.
Recessions are defined as a period of temporary economic decline lasting at least two consecutive quarters of declining gross domestic product (GDP) as a result of declining employment, trade, and industrial production.
Recessions often follow periods of strong growth and are inevitable. According to the The National Bureau of Economic Research, the United States has experienced 32 recessions since the mid-1850s. With the understanding that recessions will likely happen at least a few times in one’s lifespan, it’s important to have your personal finances and priorities in order to help prepare for and survive any potential economic downfall.
The following are beneficial tips to help you prepare for a recession:
Understand Your Finances
If you are wanting to get out of debt, save money, or better understand where your hard-earned money is going, the most important thing to do is to create a plan that clearly identifies how much you earn each month and how much you spend each month. You can track your income and expenses by downloading free monthly expenses and income trackers here.
Create an Emergency Fund
Many people understand the importance of saving money, yet they believe they don’t make enough to save, or they think saving money requires establishing a difficult budget plan. The truth is individuals can save money regardless of how much they make and without having to create a challenging budget. If you want to create an emergency fund of $1,000 over the next twelve months, open a savings account and automatically deposit $24 every two weeks ($84 a month) for 12 months. “Your emergency fund is the buffer you need between you and life all the time, not just when there’s talk of a recession.” – Dave Ramsey
Pay Off Debt
Pay down your existing debt as much as possible. Starting a debt-free journey is not easy, but it is also not impossible. A great way to pay off debt is by using the Debt Snowball Method. Dave Ramsey explains the debt snowball method “as a debt reduction strategy where you pay off debt in order of smallest to largest. When the smallest debt is paid in full, you roll the money you were paying on that debt into the next smallest balance.”
Reduce Your Spending Habits
A crucial part of paying off debt and saving money includes changing your spending habits and being willing to make sacrifices. Look at your expenses and eliminate wherever possible. For example, if you have cable, Netflix, and Hulu, eliminate whichever one you watch the least amount of. If you go out to dinner five times a month, cut back to only once or twice a month. If you spend $200 on clothes each month, cut back to $50. Sell anything you no longer need/use by hosting a garage sale or selling items on CraigsList. “During a recession, the purchase of luxury goods and non-essential items slows down tremendously. It should be no different in your monthly budget.” – Fo Alexander
Don’t Stop Investing
Even though you may be tempted to pause your investments or contributions to your 401k, don’t panic. “When you hear the word recession, you might think you need to sell your stocks and step away from investing. But hold on, take a breath, and don’t do anything out of fear. Investing is a roller-coaster ride, and you don’t want to hop off the coaster while it’s still going! Instead, wait. Ride it out. Stocks rise and fall all the time.” – Dave Ramsey
Breathe, Relax, and Don’t Panic
It is important to remember that during challenging times, it’s okay to feel worried, anxious, scared, or sad. Your feelings are valid, and they should not be ignored or pushed aside. To help with one’s emotions and feelings, it’s important to focus on things you can control. To help you relax, try one of the following exercises:
Don’t let a recession, emergencies, or life catch you off guard. When it comes to your finances, make sure you understand your expenses and income so that you can easily adjust and re-allocate funds should the situation arise.
“It is all about preparedness. The bottom line here is to think ahead and start developing strategies. As usual, those who are most prepared will suffer the least and bounce back much more quickly when things inevitably turn back around (and they always turn back around).” – Forbes.com