What is a Recession
Before we list down the steps on how to prepare for a recession, let us first define what it means. A recession is when a nation has a wide economic decline that lasts 6 months or more. A prolonged period of recession lasting 3 to 5 years is called a depression. Click HERE to learn more about the different types of economic declines.
When do Recessions Occur
There are several factors that can lead to this. Here is an infographic of the past recessions in the United States since 1945:
Looking at the infographic, we can see that the longest gap without a recession was 10 years. The latest recession ended in 2009, more than 9 years ago. If the historical trend continues, then that means that the next recession could come as soon as the end of 2018.
How to Be Financially Prepared for a Recession
1) Increase Your Buying Power
It might sound contradictory to logic, but it is possible to profit from an economic crisis. Here are the stock prices of some companies during the 2008-2009 recession and their prices in 2018:
In order to prepare yourself for these buying opportunities, you need to have a stockpile of liquid assets. And nothing is more liquid than cash.
2) Build Up An Emergency Fund
An emergency fund is the part of cash savings that you do not invest no matter what. It is the stockpile you use when worst case scenarios happen. Under normal conditions, it is advisable to maintain an emergency fund equivalent to 6 months of your expenses. During recessions, a minimum emergency fund equivalent to a year’s expenses is highly recommended.
3) Re-assess Your Investment Position
Assess the risk levels of your investments. Are you able to absorb your losses in case a recession does happen? If not, then it might be a good idea to transfer your riskier investments to more stable financial instruments.
Noone really knows for sure when a recession will occur. The only thing we know for certain is that it will. It never hurts to prepare, especially for something that could drastically affect your livelihood.