Many Americans have started to prepare for Recession due to the global crisis we are all facing. The fallout from the Coronavirus pandemic has turned a public health problem into an economic one. Many economists have speculated that the current crisis could eventually lead to a global recession. Despite the severity of the upcoming economic crisis, there are plenty of ways to prepare for Recession.
Why do recessions occur?
Recessions are defined as periods in which economic growth ceases, and the economy starts to shrink. Recessions are bound to happen at some point in time, but their occurrence is still difficult to predict. Experts look out for tell-tale signs of a coming recession, but the length and severity recessions are hard to guess.
A recession’s impact on the economy can vary greatly. Some economies do bounce back after short recessions. Other recessions such as the 2007 recession can upheave the lives of millions, and can take decades to fully recover from.
These events are inevitable, so here are some steps people should take to prepare for recessions.
Create a budget for spending
Most people should familiarize themselves with their spending patterns. Learning where your money is going is important if you wish to cut down on unnecessary expenditures.
Knowing how to budget properly could be useful if you believe you’re going to lose your primary source of income in the near-future. The coming recession will make it difficult for people to cover their expenses and pay their bills, so they may need to ask for help.
Prepare for Recessions using a 50/30/20 budget
Many people have had success following the 50/30/20 budget formula to help them keep up with expenses. This formula refers to spending 50% of your post-tax income on essential needs, 30% on wants, and 20% on savings.
You should try and calculate your expenses and limit them to the proportions suggested by the 50/30/20 formula. If 45% of your expenses are going towards non-essential wants, you will need to reduce your expenditure on these items. This change may be needed if you wish to pay your bills during the recession.
Start a side hustle to prepare for Recession
Some people often take up secondary occupations or “side hustles” to make extra cash. This money can be put towards “wants”, while the income from their primary job goes towards “needs” and “savings”. Starting a side hustle can be a useful way to prepare for recessions as it provides you with a source of income if you lose your primary job during the crisis.
Prepare for Recession by building up savings
Another way to prepare for an upcoming recession is to build up your savings. You can do this by placing your savings into a high-yield savings account.
You should also set up a transfer system in which a portion of your monthly earnings is automatically transferred to this account. Then it’s a matter of watching your savings grow and resisting the urge to spend while you prepare for Recession. People that use this system should make sure they are not being charged monthly fees for using this account.
Some banks will charge a fee if the account balance dips below a certain amount. To avoid this problem, you could switch to using a savings account at a different bank that does not charge such fees.
Switch to using low interest credit cards
People that use credit cards frequently have to grapple with high interest rates. These costs can add up over time, and can be a nightmare to deal with when you’re short on money, especially when you are preparing for a recession. To get around this issue, many people switch from using high-interest credit cards to low-interest ones.
However, these low-interest cards are offered only to people with good credit scores. If you qualify for such a card, you may have to still pay balance transfer fees that range between 3% and 5%. Using this method could be beneficial if your existing interest rates are higher than the balance transfer fees.
Pay off high-interest debts ASAP
People with poor credit scores may not qualify for the aforementioned low-interest cards. However, they may still be able to save money on their existing high-interest credit cards by paying off their debts as soon as possible. This could help save money in the long-run while they are preparing for the recession.
High-interest rate charges tend to add up over time, so paying off the debt quickly is the best way to avoid paying extra interest.
Revise your student loan strategy as you prepare for Recession
The government has suspended payments on Federal student loans until September 30th 2020. These loans will not incur interest during this time period either. This gives recent graduates a few more months to pay off their student loans.
People can take advantage of this situation by paying off part of their student loans during this suspended period, as a way to avoid paying interest.
Prepare for Recession by investing in stocks
It may seem counter-intuitive to buy stocks at a time when stock prices are falling. However, purchasing stocks at a low price and then holding onto them could allow you to reap rewards in the future. People that own stocks should practice patience when their stocks appear to be falling, as selling them locks them into a loss.
If you are preparing for a recession, you should hold onto your stocks and strategically reinvest them to minimize your losses.
Try to stay on top of things
It can be easy to get overwhelmed by the numerous problems a recession brings with it. It’s important to keep a level head and avoid brash decisions during the difficult times ahead.
If you have spent the time to prepare for Recession, you should do your best to stick to that plan as best as you can. Making important life choices can be hard when you have so many things to deal with at once.
So take a step back and rely on the resources you initially set up when you prepared for the recession.
Benjamin is a technology enthusiast. He formerly consulted and handled communications for multiple tech startups. Now he works with the Xtrapoint Digital Network as a full-time journalist and is given the freedom to explore finance, history, and the arts.