Recessions can be as terrifying as they are unpredictable. They can drastically change not only the economic landscape around you but also your own budget, job, and daily life. Preparation is critical for keeping yourself and your loved ones safe from financial distress if the economy takes a turn for the worse, but it can feel daunting.
Fortunately, you can begin implementing small changes today that can help you tomorrow, even in the face of a recession. Read on to understand what a recession could mean for you and how you can protect yourself.
What is a recession?
A recession is a period of widespread economic decline. During a recession, a country’s economic activity slows substantially; industrial production falters, businesses struggle to make sales, and people make fewer purchases because they have less income.
Economic growth grinds to a halt. These periods can last for several months or several years. If you’re not prepared, a recession could have severe consequences for your employment, housing, and budget.
How might a recession affect you?
Recessions’ potential effects on your life depend on your circumstances. Companies often lay employees off during periods of economic downturn. Alternatively, they may cut costs by reducing pay, benefits, and bonuses.
If you lose your job, it could take a while to find a new one during a recession since high unemployment rates mean steeper competition for positions.
Reductions in your income make rent and mortgage payments harder to manage. If you’re employed, short-term loan options like payday loans could help you pay bills that fall between paychecks. Still, making ends meet during a recession is daunting. Fortunately, you can take some steps to make it easier.
How to prepare for a recession
No matter what your finances look like, a few actions can protect you and your family from the worst possible outcomes of a recession.
Research financial tools
It’s a good idea to understand the loans available to you before you need them. Some options, like home equity loans and installment loans, offer large amounts that you repay over time.
Others, like cash advances and payday loans, provide you with temporary relief between paychecks but require repayment quickly. Taking the time to learn how these tools work and to identify reputable lenders can equip you to make the right choice if the time comes.
Set savings goals
Emergency savings can keep you afloat during recessions. Setting specific savings goals can help you establish a financial safety net to use if you lose your job or struggle to cover bills. Try working toward a $500 emergency fund at first.
You can make saving more manageable by breaking that goal into smaller monthly chunks. Once you meet your goal, you can increase it and build your savings. A thoughtful savings plan can bring you peace of mind in knowing you’re prepared for whatever tomorrow brings.
Consider your budget
Taking stock of your finances is vital for weathering economic hardships. If you don’t have a budget, you can start by calculating your household income and monthly expenses. Try to identify areas where you could cut costs.
To prepare for a recession, you can create variations of your budget to accommodate a reduced salary or job loss. That way, you won’t be blindsided by changes to your income.
Lean on your loved ones
Sometimes, your friends and family can be the best resource during a difficult financial time. If you want to prepare for a recession but are unsure where to start, talking to your loved ones about their financial preparations and any precautions they’ve taken can help.
You may also find that you can save money by sharing skills or resources. For example, you might save money on daycare if family members can provide childcare, or a friend might help connect you to a more affordable apartment.
The bottom line
Making plans for the worst-case scenario, like losing your job in a recession, can feel overwhelming. However, it doesn’t have to be. Even if you haven’t started preparing for a recession yet, you can break the process down into a few approachable steps you can move through at your own pace.