Preparing for a Recession
A recession is an economic downturn where national GDP falls for two quarters in a row. What does that mean to you? Quite a bit.
During our last recession from December 2007 to June 2009, most Americans were unprepared for what was ahead. Most would say “how do we prepare for something like this?” That’s a great question, and we will tell you how.
First, it’s important to know that recessions don’t just come out of nowhere. They take time to identify.
In fact, we do not actually know we are in a recession until the National Bureau of Economic Research (a private, nonprofit group of economists) declares a recession has begun. It typically takes months, if not a year, for the group to announce that exact timeline. For example, they declared in December of 2008 that the Great Recession began in December 2007.
To say a recession is when things are bad economically for America isn’t totally accurate. Typically, a recession begins when things simply are not as good as they were.
So, knowing all of that, how do you prepare for a recession?
- Pay Your Debt Down
- Credit card debt: Pay this down as quickly and as much as you can so you have a little “wiggle room” in your finances.
- Mortgage: Being ahead in mortgage payment will help you quite a bit when you do not have a job and a way to pay it. Some suggest paying three months ahead, but now that we see what a pandemic can do, something along the lines of six to nine months may be better.
- Auto loans: Paying off your car completely may not be an option, but making some payments ahead can really put your mind at ease when layoffs come and you are left with a car payment, along with everything else.
Prioritize eliminating high-interest debt as much as possible, and especially for those items (house, car) that you need to survive. Set aside or keep at a minimum the ones that are not a priority such as student loans.
- Have Emergency Savings
Long gone are the days of having only two months salary in the bank. Economist state having at least six months, if not a year’s salary is much better. Today the cost of living is quite a bit more, and as the pandemic has shown us, many things can go wrong when it comes to jobs, unemployment, and just getting by day to day.
Even while you pay down debt, you should have a certain amount of money set aside every month for your emergency fund. This money shouldn’t be touched by anyone unless a decline is occurring, someone loses their job, or a medical situation comes up where employer pay isn’t an option.
- Significantly Reduce Spending
Go through one month of your expenditures and find ways to cut back on them. Anything discretionary needs to be removed. All subscription services, dining out, alcohol, and anywhere else you can cut monthly spending should be on the table.
When you sit down to do this, keep the figure you’d like to pay monthly in mind and then cut down to it.
- Create a Budget
While you’re cutting out discretionary items, it is time to make an actual budget you can stick to. Start with the must-haves like your house and car, then add in insurance, food, and other important items.
Keep in mind your discretionary items should not be over 30% of your net income. If it is over that, then go back to #3 and start cutting them out.
Whether you have been at your company for eight years or 20, you will want to keep putting that money into your retirement. Even when the stock market looks bad and it appears you’re losing money, it is a wonderful time to buy, so keep your investment in place and make plans for your future retirement.
- Plant a Garden
It sounds simple, but it sure saved our grandparents and great-grandparents when the Great Depression hit in 1929. This is when we valued gardening, canning, storing, and keeping food for longer periods of time. It is when we planted and harvested our food because if we did not, we did not eat.
Plan out the items you want to plant and where to plant them. Make the investment in a canning book, canning jars, and the other items you will need to properly store food and grow it yourself. There is great pride in being self-sufficient.
During this period, we are going through a meat shortage. How impactful that ends up being on our day-to-day lives remains to be seen but finding another place besides a grocery store to get your meat is a good idea.
Local butchers have meat available, and if you have room and ability to care for an animal, raising it to be food for your family is a great way to make sure you have meat on the table.
Hunting is also a great idea. Getting the license and hunting for food will make you proactive in ensuring your family has food on the table when times are rough.
While this isn’t everything you’ll need to survive a recession, it will certainly put you on the right track to handle life’s challenges without doing too much damage to your family and finances.