- The market moves around every day but sometimes it hits a recession.
- A recession is when a market stops growing and enters negative growth.
- Our 5 steps to better prepare for a recession include building an emergency fund, paying off debt and knowing how much it costs to be you.
Imagine that the markets are like waves in the ocean.
The market moves every day like those waves. Sometimes they’re up, sometimes they’re down. It’s a fairly routine phenomenon. That normal pattern gets disrupted when we have a recession.
A recession is when the market stops growing.
We fear a recession because it will likely impact your life and those around you. For most people, economic growth is good, which means when we have a recession declared after 6 months of negative growth, which brings short term stress and long-term consequences.
A recession is a country-specific or larger international economic event. As one person, you can’t control when or whether a recession will happen. You can however start preparing for a recession ahead of time so that when and if a recession happens, it won’t tank your finances. There’s many different ways to respond to a recession and taking steps to prepare now.
Here’s 5 steps to better prepare for a recession:
1. Build your emergency fund now
An emergency fund is essential because it helps you sleep at night. It’s defined as a reserve as cash that is liquid, which means that you can access and use it quickly when you need it. It’s crucial to know why you need an emergency fund so that you’re motivated to build one now. If you’re a fan of sleep and want to take action now, there are 5 steps to build an emergency fund to ensure you have at least $1,000 ready for life emergencies.
2. Check your risk profile
Your risk profile is how much risk you can tolerate. Your risk profile takes into account a number of factors including your goals, the timeframe for your goals and whether you prefer taking more conservative or aggressive risks with money. A bank may also look at your risk profile when considering whether you lend you money. You need to know your risk profile and make a decision about whether you’re comfortable with your level of risk, particularly if a recession is predicted.
3. Pay off debt
If a recession is a mountain for us to climb, debt is the rock in your backpack weighing you down. Debt is an obligation on our future self, taking away from how we might choose to use assets in the future. You lock future you into repayments and that’s a toxic relationship you can do without. Reducing your debt levels before a recession could be helpful if you’re already feeling the stress from your debts.
4. Prioritise your career development
Recessions have a negative impact on people’s income. You may lose your job and need to find a new job during a recession which can be tough as more people are looking for work. Now is the time to recession-proof your skills. Undertake courses at work that will stretch the skills you have or undertake some studies to broaden your qualifications in a relevant area. Get networking so that you know people in your field and industries you may want to work with in the future.
5. Know how much it costs to be you
Let me ask you a question: how much does it cost to be you each month? A staggering number of people cannot answer that question. The reason you should know where your money goes each month is so that you can budget in advance and make sure you have enough money to get through the months ahead. The best way to do this is to budget by finding the right budgeting method for you such as the 50-30-20 budget method.
Recessions and market downturns have happened throughout history.
What goes up must come down and to some extent, market growth will eventually lead to a market decline. That downturn and recession may be inevitable but with these 5 steps to better prepare for a recession, you can at least be ready for the next one without losing sleep over it.