During a financial recession, your wealth can take a major hit. Unfortunately many people found that out during the Great Recession in the late 2000s.
But, what are recessions exactly?
Well, according to Investopedia:
“A recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade.
The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (or GDP)…”
Alright, so what does this even mean?
Well, if the entire economy is slowing down for six months – meaning, no one is hiring, no one is shopping, and no one is producing – then we are in a recession.
And you can see how this can turn into a downward spiral, right?
If – for whatever reason – people stop buying things, then producers will cut down on the amount of stuff they make because they have no one to sell it to. If producers stop making as much stuff, then they start to lay off their workers because they don’t need them to make more stuff.
Those same workers will also stop buying stuff because they don’t have the money to pay for it, and then more producers stop making as much stuff because they can’t sell to those people, and they lay off more workers, and then the spiral keeps spinning and spinning downward.
Pretty scary, right?
Well, you can be scared or you can just be prepared.
Because if you take a look at the history of GDP in the United States, you will realize that recessions aren’t new. In fact, they happen pretty darn often.
On average, recessions in the United States have occurred about once every 5 years since the Great Depression.
So, now that you know what recessions are and how they work – let’s talk about the 5 different ways to prepare yourself for the next one:
Step up your emergency fund
As we mentioned above, one common characteristic of a financial recession is a decline in hiring. This means companies are laying off workers AND many of them are no longer hiring. If you were to lose your job and unable to find another one, the LAST thing you want to do is to to dip into your investment accounts. Or – even worse – get into debt.
So what do you do?
Get prepared by building an emergency fund.
If you already have 3 months saved, try building it up to 6. If you already 6 months, try doing the full year. Keep the money in an easily accessible savings account.
Get Rid of Your Debt
Believe me – if you’re out of a job and having a really hard time trying to find a new one, the LAST thing want is debt collectors and loan collectors breathing down your back, and asking you, “Where’s my money?”
It really sucks, and it’s really stressful and the best thing to do now is just prepare yourself by getting rid of as much debt as humanly possible.
Down on Your Expenses
So, a funny term that you’ll hear a lot in the personal finance community is “lifestyle inflation” – which basically means, as you make more money, your lifestyle expands to meet it.
But, in a recession, lifestyle inflation is actually pretty dangerous
For instance, if you get a raise, it’s not a great idea to go out and sign a year lease on an apartment with a rent increase of $1,000 more per month. If you lose your job, you’re on the hook for the rest of the year for an apartment you can’t even afford.
Remember: raises are for saving, they’re not for spending.
So try to keep your expenses as low as you possibly can.
Start a Side Hustle
Recessions and economic downturns are always much kinder to those who hustle. And, this makes sense – right?
If you lose your 9-5 but you have a profitable gig on the side, you’re actually a lot better equipped to take care of your expenses. You’re less likely to dip into your investments or go into credit card debt. And there’s many different ways that you can earn extra money on the side. You can write articles for bloggers, you can braid hair, or you can do freelance marketing for small businesses.
Upwork is a really great site for people that are just getting started, and I’ve used it to write articles for other people and make money.
Learn New Marketable Skills
During a recession, it is true that a lot of people stop hiring. Still, companies who have positions open are looking for people that can bring a lot of skills. This way, they essentially get more bang for their buck.
Now, I don’t mean that you should go out and learn how to fix cars if you’re a biology teacher. But, if you are a biology teacher, you can learn how to garden. That way when you’re out looking for a new position, you can tell potential schools, “I know how to plant a garden and I can start a community garden for your school.”
(By the way, if you’re a biology teacher that also gardens for schools, please let me know because that is awesome.)
What are you doing now that will help you survive the next financial recession?
This post originally appeared on Broke Girl Rehab. It is reprinted here with permission. Changes have been made.