Personal Finance

How to prepare for a recession

Preparing for a recession? You’re not alone. Brexit and other geopolitical events have many people preparing to tighten their belts.

Although analysts continue to debate the likelihood of a recession in the UK in the near future, it’s better to be safe than sorry, as the saying goes, so if you’re looking to secure your financial situation ahead of an economic downturn, consider this your starting point.

How to recession proof your finances

1. Budget and reduce expenses to live below your means

Even during stable markets it’s wise to live and spend below your means. That way you can build up an emergency fund, invest in assets, and generally prepare yourself for any unexpected life events. Even millionaires do this to accumulate and build wealth. If you expect to be hit by a recession, that’s all the more reason to evaluate the costs of your lifestyle. Money Dashboard can help you do this by pulling together your spending history and making a budget and savings plan.

2. Pay off your debt

Your debt collectors are not going to care that there is a recession and money is tight. If anything it can make them more determined to get what’s owed. So if you want the best possible personal finances in a recession, try to pay off, or mostly pay off any debts as quickly as possible. Money Dashboard can also help you evaluate every month how much money you can allocate to repay your debts earlier.

3. Have your emergency fund ready

You never know. And you should always prepare for the unknown. To best protect your finances in a recession try to build up an emergency fund that can help you get out of hot water when an expensive event occurs, like job loss and sudden home or car repair. A best practice is to open a separate savings account—preferably one with a high interest rate and no penalties or restrictions on withdrawals at a moment’s notice—and start funnelling small amounts into it every month, and whenever spare cash is on hand.

4. Build up your credit score

Like it or not, your credit score matters a great deal. And a good credit score opens all kinds of doors to better deals and opportunities to borrow money, if necessary, at lower interest rates and lower penalties. The method by which scores are calculated may not always seem sensible, but if you want to build up a score you have to play by the rules. One of the best ways to boost your credit score is to get a credit card and keep the balance low, and pay it off regularly. Another best practice is to pay all bills on time in full. If you don’t know your credit score, you can check it for free with services including ClearScore and Credit Karma.

5. Diversify your portfolio

Looking for how to recession proof your portfolio? A properly diversified portfolio can help you prepare for a recession and smooth out the returns on your investments. That means spreading your money across a variety of asset classes, industries and geographical locations. By diversifying, you limit your plan’s negative exposure to any single event. Although past performance is no guarantee of future performance, if you are looking for assets that are recession proof, consider that gold, government bonds, and cash, have been historically recession proof. Utilities and some consumer staples stocks can also potentially resist a bad economy.

6.Start an opportunity fund for your investment portfolio

When it comes to investment markets, what goes down often goes back up. Back in 2008, many people withdrew 100% of their investments from the stock market in fear that the recession would be unrecoverable. They were wrong. It’s helpful to remember that historically, markets go up in the long term (usually more than 10 years). Those who panic and take out money in a period of recession or high volatility risk missing out on any recovery and future gains. What’s more, everything may become a value stock during a recession so be ready to buy when stock plunge.

Source: MacroTrends. 90 year historical chart showing the S&P 500 stock market index. Historical data is inflation-adjusted using the headline consumer price index (CPI) and each data point represents the month-end closing value. Shaded areas represent periods of market recession. Remember that past performance isn’t a guide to future performance.

7. Evaluate your work situation

Look, not every job is sustainable in market recessions. People and businesses alike are bound to cut their costs, and any non-essential costs are first to go. So take a moment to consider if your job and skill set it unessential in hard times. If not, great. If yes, you may want to start expanding your skill set, build your network and think about moving jobs. Free online academies and LinkedIn can help you there.  You may also want to consider starting a side hustle, from crafts to home repair to delivery work to bring home additional income.

Bonus: Survival tips from the Great Depression

When thinking about how to survive a recession, we are often reminded of the Great Depression in the 1930s. It’s unlikely that a modern market crash will be as dire. But there are some helpful money saving tips to pull from their experiences.

Beyond the essential “be frugal” and “stay out of debt” lessons described above, here are some helpful tips from ThreeThriftyGuys for how to prepare for the next great depression:

* Reuse, Reduce and Recycle. Remember those three Rs? They sure didn’t.

* Grow and pick your own food – Why spend money when you can put a patch of land to work growing nutritious fruits and veggies? If you don’t have a garden fit for planting, consider an allotment. And forage for seasonal herbs, berries and leafy greens whenever you can.

* Preserve your food – Respect your food, and preserve any excess that you’re lucky enough to have. Jar and can it for when it’s most needed.

* Multiple sources of income – Side jobs often helped people make ends meet in tough times.

Use these tips to financially prepare for a recession and you should be in a much better position to whether any hard times ahead.

Becca Lipman

Financial Editor