Steps to prepare for a recession
Recession is a scary word, and according to some reports, Canada is technically in one as of May 2020.
So, what is a recession? It is defined as 2 consecutive quarters of decline in GDP. In layman’s terms, a recession is when there is a decrease in economic activity for 6 consecutive months.
There is a lot of uncertainty when it comes to recessions. They can last for a few months to a couple of years and can vary in terms of severity. Unemployment is high during a recession, and consumer spending is low. Businesses cut back on costs or close completely. Asset prices go down and the central bank lowers interest rates to keep the economy afloat.
The last big one was the Great Recession of 2008-2009. As most people are gearing up for the second recession in their lifetime, here are some areas that you can focus on if you want to prepare for a recession.
During an economic downturn, as revenue goes down, companies looking to cut costs do massive layoffs. In fact, this study found that older workers may be more at risk of job loss because they are perceived to not be up-to date on relevant skills. People face job uncertainty and very few places look for new hires. Consequently, you should continuously work on improving and upgrading your career skills to keep yourself relevant in the job market, whether to make yourself indispensable at your current work or to look for new employment. Investing in yourself and your career is the biggest thing you can do to prepare for a recession.
Read this if you have been laid off because of Covid.
This is the time that you should really work on building up your emergency fund to prepare yourself in case there is a loss of income. Build a budget, live within your means, and reduce your spending to bulk up your savings. Having another source of income like a second job, part-time gig or a rental property also helps.
If you can, pay off your high interest debt like credit cards. Otherwise, they will be another burden on you if the economic situation worsens. In the same vein, do not take out additional debt that you are not able to service. Reducing your credit card balance may have a secondary benefit in that you will have an extra spending buffer on top of your emergency savings.
Do not let your credit score slide. Lenders tighten their lending criteria during a recession and having an excellent credit score will ensure that you can still avail of credit if needed. With a good credit score, you may also be able to lock in lower interest rates for mortgages during a recession.
Retirement and Investments
Well-diversified, long-term retirement and investment funds are built to weather economic ups and downs. You can take advantage of low stock prices by making regular retirement contributions even when the economy is down. However, understand your own risk tolerance and talk to a financial advisor to make sure that you have the right investment portfolio for your needs and risk profile.
Recessions can strike fear in us, but keep in mind that they are a natural part of the business cycle and are to be expected every decade. They are also always followed by a period of recovery.
Most people will experience a recession, and everybody gets affected by one. Being prepared, taking control of your finances, and having a positive mindset will help you in the recovery process.
To improve your financial knowledge, check out our other articles.