However you want to label it, we’re in the midst of a financial crisis.
People are racing to stock up on everyday consumables. Toilet paper, bottled water, canned foods, you name it. Events and conferences are being postponed, even canceled. The media is in a frenzy, but what else is new? And even more concerning, markets are crashing with record declines that we haven’t seen in the last ten years.
The tell-tale signs of an economic recession are there, and it’s causing people to worry, stress, and panic.
Unfortunately, a recession is something that is beyond our control as individuals. But we can control how we prepare for a financial recession or respond to economic instability to make sure that we not only survive but thrive.
Regardless of the financial decisions you could have and probably should have already made up until now, you didn’t and that’s that. We’re here now.
In a time of uncertainty and economic turmoil, your number one job and priority is to protect the financial security you still have. Truthfully, we should all be taking these measures regardless of financial crises or recessions, but the importance needs to be stressed that much more during these times.
Keep reading below to find out how you can survive and thrive during financial crises, recessions, and pandemic outbreaks.
What is a recession and how will it impact me personally?
Before we dive into each one of the ways that will help you survive and thrive, let’s take a look at what exactly is a recession and the impact it can have on your current lifestyle.
According to the National Bureau of Economic Research, recessions are defined as “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”.
The simplest way of defining a recession is a significant decline across markets and in economic activity. Recessions generally occur when there is a widespread uncertainty or a significant drop in production or spending. This drop in spending can be triggered by a variety of different events, such as a financial crisis, an external trade shock, an adverse supply shock or even the bursting of an economic bubble.
Recessions can have detrimental and snowballing effects on the economy. Businesses, especially smaller businesses, are threatened by the lack of spending which causes significant financial losses, even bankruptcy for many companies. This inevitably leads to layoffs and unemployment. The increase in unemployment snowballs to sharper declines in spending habits, resulting in even less money in the economy.
Even though recessions are considered a natural part of the business cycle, recessions are painful. People lose their jobs, lose their homes, young people lose immediate career opportunities, and more. You are lucky if you are not impacted by these significant events, but your retirement accounts and investments will likely still be impacted.
To say the least, it’s extremely important that you navigate any financial crisis and recession with diligence to protect your current financial well-being and your future financial security.
Below are 9 ways you can make sure that you are surviving and thriving during the most difficult financial situations:
Recession Proofing #1) Check your mindset. Stay positive. Don’t panic.
How you decide to manage your money, your household affairs, and pretty much everything else in your life begins with the decisions you make. If you think you can, then you can – if not, then you won’t.
That’s why it’s important that you are able to adopt (and maintain) a positive mindset during these challenging times. It’s easy to list dozens, if not hundreds, of things you can and should be doing with your money, but your mind needs to be in the right place first.
One of the absolute worst things you can do in times of any financial crisis, or even just challenging life situations in general, is panic. Panicking has an immediate effect on your decision-making abilities and adds to the already-high-stress that everyone around you is experiencing. Just like your credit card interest, stress and panic compounds and has a detrimental impact on not just your own judgement (and money), but on others around you too.
It’s important that you reframe your mindset, shut out any negativity, remain positive, and focus on what you can control.
Recession Proofing #2) Make sure everyone is on the same page
Next, as you develop a positive mindset and the confidence to help get through this difficult situation, it’s important to make sure that your family and close friends are on the same page.
This especially rings true for your immediate household. Any level of panic and uncertainty is felt by all members within the household and causes people to put up barriers.
Here’s what I would recommend doing with your household:
- Sit down with every member of your household to discuss the situation, preferably all together.
- Be completely transparent about things going on in the household (whether you are struggling emotionally, psychologically, financially, etc). Remember that it’s your job as a household to support one another. Everyone has a role to play.
- Allow everyone, including children if you have them, to ask questions openly and voice any concerns they have.
- Create a dialogue specifically around finances, being as transparent as possible, about what the next 6-12 months look like. If you have a plan that you have been working on, now might be a good time to share it with everyone.
It’s really important to make sure that everyone’s voice is heard. Where there are differences in money opinions is where you need to focus on the most and ensure that everyone is on the same page rather than having overly conflicting views on how to manage your finances.
There’s no better time than now to lead by example for your children and your significant other. Display confidence that things will be alright and that by working together, your family will be able to pull through and thrive.
As for your close friends and family outside of your household, it’s also extremely important to check in with them, share money management plans, and ensure that support systems are put in place.
Recession Proofing #3) Revisit your budget and spending plan
Next, it’s time to start putting your spending plan to action. If you already have a budget that you’ve been working with, you will want to take the necessary time you need to revisit it, review it, and make sure that it’s in your best interest for these difficult times. This may require adjustments on where or how you are spending your money and cutting down on certain areas.
If you have yet to create a budget, now is the time to start and you need to take this seriously.
While it’s true that during a recession it can be extremely difficult to navigate your finances and cover day-to-day expenses, there are some important steps you can start taking today to make sure that you are navigating this difficult time with careful planning and confidence.
1. Take care of the necessities first.
Unfortunately, even as the economy slows down, there will be payments and expenses that are not optional. These include things such as your rent or mortgage payments, utilities, loan payments, and basic food. Above all things when it comes to your budget, it is absolutely critical that you are making your necessities and fixed costs your top priority.
2. Ensure any debts are controlled.
During recessions, it is no surprise that debts can get out of control. Carrying high levels of debt can be very risky because any slight change in external factors could end up impacting your ability to pay these debts.
You need to make sure that you are staying on top of your debt payments, without making late payments, to ensure that your debts are not negatively compounding to a point that you are taking on even more of a financial burden. While you may be able to manage debt payments now, unemployment or interest rate hikes combined with banks tightening credit limits could change that for the worse.
3. Cut spending and live well within your means.
Downsizing and learning how to live frugally can be a great strategy. If you can learn to make do with less, you’ll increase your savings and you won’t find yourself struggling to adapt to a new lifestyle when a recession hits.
Living frugally isn’t as difficult as it sounds. Despite what the popular opinion may be, a frugal lifestyle isn’t about penny-pinching or depriving yourself of things that bring you joy. It’s actually about making conscious spending choices that reduce discretionary expenses, with very minimal impact on your lifestyle.
Now would be a good time to get a better understanding of what you truly value and focus your efforts there. If you do that correctly, things will be more than fine.
4. Manage your savings and your emergency fund.
When the economy starts to dip, our jobs and our income can be put in jeopardy, and it’s for this reason that saving an emergency fund is crucial when you prepare for a recession. In a nutshell, an emergency fund is money you’ve saved up for the sole purpose of helping you get through your day-to-day living during financial hardships. I’ll spend a little more time talking about this below because of the effect it can have on your overall financial picture. Keep reading to learn more.
5. Utilize budgeting tools and apps.
Lastly, to make sure you’re doing all that you can, I’d recommend taking advantage of budgeting tools like YNAB or Mint, which have been known to help individuals budget more effectively. Additionally, you can compare how YNAB or Mint stacks up to EveryDollar, a budgeting tool by known personal finance authority, Dave Ramsey.
To help you better save and budget your money, here are 30 great money-saving tips you can also check out.
Recession Proofing #4) Map your income sources
One of the most overlooked ways of protecting your financial well-being during recessions is having a plan in place for your (un)employment. In fact, this might arguably be the most important thing on the list, for obvious reasons.
There is only one thing that I ask you to take seriously: Please, please, please do not assume and expect anything from your employers.
It is crucial that during times of an economic downturn you are not assuming that things will be ‘business as usual’ when it comes to your employment and the income you’re earning. It’s a known fact, which I talked about right at the beginning of this article, that when the economy shows signs of a recession businesses will be less profitable, naturally leading to layoffs.
Now, it’s completely normal that reading this might make you feel uncomfortable and even give you those gut-wrenching feelings. It means you care and understand this is a priority. If you’re unsure of exactly how to navigate this particular area, here are some necessary steps that I would personally take to ensure your income is protected at all costs:
- Demonstrate your worth.
While this is something that you should always be doing regardless of any circumstance, it’s that much more important to make sure that you put in the effort to improve yourself, to exceed all expectations, and to become indispensable to your employer. If there are only select layoffs based on employee performance and their value to the company, this will help ensure that you remain employed and still earn a regular income.
- Sit down and talk with your employer.
Depending on the size of your company, there are a few ways you will likely be able to navigate this. But what I can tell you is that while having a discussion with your immediate manager(s) is a good start, they might not have all the answers you need. I’d recommend sitting down and having a conversation with executives that oversee the business, and have more control of the financial standing of the business. Remember, during times like this, no one should be ‘too busy’ or ask you to put it in their calendar for next week… Next week might be one week too late. For larger companies, I’m talking 5,000+ employees, having one-on-one conversations wouldn’t be ideal, so if your company hasn’t held a town hall or general meeting about these issues, ask for one.
- Sit down and talk with your colleagues.
It’s very important that you have open conversations with your colleagues for a few different reasons. First, your colleagues may have heard things or may have already been informed by upper management about the state of the company – now, keep in mind that rumors spread like wildfire and can also be just as negative in these circumstances. And secondly, colleagues (especially those that work closely with one another) can provide support and share different coping mechanisms that have been useful in helping them get through their regular day-to-day duties.
- Sit down and talk with your clients and suppliers.
Lastly, don’t forget to keep an open dialogue with your clients and your suppliers. Understanding how the economy has been impacting things on their end can be very insightful for how it will either impact your role (or your company’s revenue) both directly and indirectly. When you do have these conversations, it’s important to know that your questions may be reciprocated by them – so it’s important to make sure that you are well-equipped with proper answers and briefed on the information you are able to provide that does not damage the company’s reputation or business.
- Prepare for the worst.
From an employment standpoint, one of the best ways to prepare for the worst is by making yourself marketable. Even though it’s likely the last thing you have on your mind, you might want to consider dusting off your resume, expanding your network, and keeping an eye out for opportunities. Remember, at this point nothing is certain and by preparing for the worst you will ensure that you are ready to make necessary changes to safeguard your employment.
The bottom line here is that it’s important to take the time to ask these important (and difficult) questions so that you can better protect your financial security.
Additionally, if you’re looking to explore side hustles and part-time jobs to pad your savings, you’ll be glad to know that there are several proven ways of making money from the comfort of your own home.
Recession Proofing #5) Build an emergency fund
This is something that I briefly mentioned earlier. It is so important for your finances to make sure you are always saving and keeping an emergency fund.
Sometimes the best way of showing the true impact of something is by backing it up with important statistics. Did you know that 95% of millennials are saving less than the recommended amount? Or that nearly 70% of millennials have enough savings to cover a $1,000 emergency? Or how about the fact that somewhere around 34% of American households have nothing tucked away at all?
The numbers and personal finance statistics are alarming. In times when nationwide financial instability occurs, they are even scarier. With next to nothing saved at all, American households need to be more resourceful and resilient than ever during recessions.
Despite what you may have heard, it’s more important now than ever to build up your emergency fund and pad your savings. The truth is that the immediate future remains uncertain. Your income is uncertain, your investments are uncertain, and even the costs of goods and services can be uncertain.
For these reasons alone, one of your top priorities should be making sure you are continually building your emergency fund while you’re still earning an income.
Recession Proofing #6) Get your investments in order
If you are invested in the stock market to any degree then chances are you have been curious and even worried about the potential impact a recession will have on your money.
Truthfully, you have every reason to be concerned and it’s important to ask questions. It’s also equally important to have confidence and remain level-headed. Times like these can end up being the difference of hundreds of thousands of dollars for your retirement fund.
Here’s a tip from financial experts around the world and perhaps the biggest one you need to know: DO NOT TAKE YOUR MONEY OUT OF THE MARKET. If you’ve thought about selling all your investments because you’re worried things will get worse, just stop right there and repeat after me: the markets will recover, the markets will recover, the markets will recover. They have recovered after every downturn since the inception of public markets.
if you’re investing for a period of five years or longer, there have been very few periods with negative returns. What about 10 years? Well, if you’re investing for 10 years or longer, there have been virtually no negative results. And if you’re investing for 15 years or more, there has never been a period when major North American stock markets did not yield a positive return.
So yes, historically, the markets will and always have recovered and resulted in positive returns. But if you pull your money out of the markets you may miss out on that recovery.
Despite the massive tech-bubble collapse of 2001 and the major global financial crisis of 2008, an investment worth $10,000 back in 1999 or 2000 would be worth around $35,000 today.
The moral of the story? Keep your money invested and weather the storm.
There is also another side of this that might be extremely beneficial for some people looking to capitalize on market opportunities. While it is certainly not the best time to sell your investments when the market dips, it could be the most opportune time to purchase investments at new lows. If you have additional savings tucked away that won’t impede your own financial security over the next 6-12 months, it may be worth considering buying stock and investing while the markets are down.
For those looking to make additional investments and capitalize on the market, there are a few options. Index Funds and ETFs are always a great alternative to keeping fees low while maximizing your returns. In fact, Index Funds and ETFs are the better options compared to Mutual Funds. Alternatively, applications like Robinhood make it extremely easy to get started and build your own portfolio right away.
Recession Proofing #7) Get advice and talk to your financial professional
If you have any type of insurance, investment, accounts, or mortgage/loan services with banks or any financial institutions, write them down, list them, and book an appointment with your advisor or direct contact at these institutions.
You’ll want to detail everything from the value they bring to the amount they cost so that you can have a conversation with them directly about how a recession might impact these services, your current financial well-being, and your future finances.
When times are tough, it’s important to know what you should be doing with your money and where you should keep your money.
For this reason, it is always wise to get a second opinion.
Recession Proofing #8) Review and revisit your financial plan
Admittedly, this should be higher up on the list as it’s one of the first necessary steps that you and everyone else should be taking.
If you’ve already had a chance to review your household’s financial plan, then you’re ahead of the game here. Regardless, it pays to be over-diligent here in making sure that your next 3 to 6 and even 12 months are aligned with the security you need to get you through these difficult times.
If you’ve previously created your free financial plan with Savology, I would recommend logging back into our application, going through your financial plan, and taking a look at your action items to see what next steps you can take to continue protecting your financial security. In times of uncertainty, it pays to be “over” diligent and thorough with your plan.
And finally, if you don’t yet have a financial plan, now is the time to make this your number one financial priority. Unlike a budget, or spending plan, that outlines your income and expenses over a specific time period, your financial plan looks at your entire financial picture to assess where you currently are now and maps out how you can reach your short-term and long-term goals.
One of the most critical and often overlooked components of a financial plan is that it takes into consideration risk management and emergencies. Your plan is there to guide you through both the good times, when things are going smoothly and the bad times so that you can navigate every financial challenge that comes your way with confidence.
Recession Proofing #9) Enjoy life and have fun
Last but not least, one of the best ways to help get you through any recession or difficult time in life is by doing what you can do to enjoy it and make the most of it.
When the going gets tough, the tough get going.
Remember, just because you may be cutting back on the amount you’re spending on social outings and entertainment, doesn’t mean that your enjoyment of life needs to suffer. There’s no doubt that you will need to make major sacrifices and adjustments, but beyond some of the financial limitations you have in front of you, you are still the same person with the same values.
Enjoying life, smiling and knowing that things will be more than alright if you follow these 9 ways to help get you through even the most challenging financial times is the best thing you can to keep you moving forward.
Recession Proof Your Finances by Preparing in Advance
A recession is largely beyond our control, but what we can control is how we prepare for tough financial times and the decisions we make while we are living through them.
Taking precautionary measures and making sound financial decisions to safeguard your financial security can make a world of difference.
When you are equipped with the methods and know-how to navigate your personal finances during a recession, you will no longer fear the “unknown”. Instead, you can move forward with confidence knowing that your financial well-being is well protected.
Your financial future starts today
Savology has helped tens of thousands of households across the United States improve their financial well-being by providing comprehensive digital financial planning. Users can get started with our free financial planning or premium monthly planning memberships, allowing them to build a personalized financial plan, holistic report card, personalized action items, and more. In addition to our consumer-facing platform, we’re helping employers across the country provide their employees with effective financial wellness benefits.