You may have noticed a significant increase in your living expenses – gas prices, car payments, food, rising interest rates, and a definite decrease in the amount of extra money. That may cause you to worry that it is a trailer before a severe recession hits.
Do not panic! We are sending you a few tips that will help you prepare for a recession and survive an economic downturn!
You can adopt various routine behaviors to fortify yourself against the effects of an impending recession or economic downturn.
Strong credit, various sources of income, an emergency fund, and living within your means are crucial resources that can assist you in maintaining your financial stability throughout a challenging economic period.
In this article, you will learn all about:
- What is a recession?
- Recession vs. Depression – the difference
- How to survive a recession? Five tips for surviving a recession
- A fantastic saving opportunity – The Infinite Banking Concept
What is a Recession?
In essence, recessions are a collection of parallel corporate failures. Companies are compelled to redistribute resources, reduce production, and prevent losses. Typically, it results in job loss for many people. These are the obvious and plain reasons why recessions occur. A recession is characterized by a sharp fall in overall economic activity.
Traditional definitions of the macroeconomic term include two consecutive quarters of growth of less than two percent, as shown by the GDP and other indices like unemployment.
As currently defined by the National Bureau of Economic Research (NBER), a recession is a considerable fall in economic activity that lasts for more than a few months and is typically reflected in real GDP, real income, employment, industrial production, and wholesale-retail sales.
The Nature of Recession
Declines in the GDP (component measures of consumption), investment, government expenditure, and net export activity for two quarters are only a few of the numerous characteristics of a recession that can occur simultaneously.
The underlying factors that these summary indicators reflect include employment levels and skill levels, savings rates in households, corporate investment choices, interest rates, demography, and governmental policies. Both income and spending decrease.
What Are The Causes of Recession?
One of the causes that can make a recession happen is an economic shock is an unanticipated issue that causes significant financial harm. In the 1970s, OPEC abruptly stopped supplying oil to the United States, sparking a recession and protracted queues at gas stations.
A recent example of a quick economic shock is the coronavirus pandemic, which crippled economies everywhere.
Another issue worth mentioning is when people or companies take on too much debt, the cost of servicing it may rise to the point where they are unable to pay their debts.
The economy is then turned upside down by increasing debt defaults and bankruptcies. A recession brought on by excessive debt was most prominently demonstrated by the housing bubble that sparked the Great Recession.
Recession vs. Depression
Depression and a recession are frequently mixed. Consider it this way: depression is a more severe long-term regional or global economic downturn, whereas a recession is a short-term localized economic downturn.
A recession means weak economic growth that primarily affects employment and output. This indicates that household consumption and income are falling nationally. These spending patterns persist in one nation throughout a recession from six months to as long as 3.5 years. Since World War II, we have encountered 13 recessions!
A depression is characterized by a significant rise in unemployment and a slowdown in the economic field in a certain area. It may even become worldwide in scope. This comprises a significant decline in building activity, global trade-stock market, and capital movements that have affected the business cycle for three or more years.
For instance, the Great Depression was nearly ten years and was accompanied by persistently negative global growth. Many families were unemployed during that time for protracted periods.
The major distinction between a recession and a depression is that the former refers to an economic downturn that lasts only a few months. At the same time, the latter is an extended period of decreased economic activity.
In general, each phenomenon has a different length. There have been fifty recessions in American history.
How to Survive a Recession? Five Tips To Help You Prepare For a Recession
Make Up a Plan
Almost every aspect of our life is impacted by money. Families, relationships, and even our physical well-being suffer when we are under financial hardship.
You can keep control of your life if you take control of your personal finance before a recession – create a financial plan!
Therefore, saving for an emergency fund is essential while preparing for a recession. Of course, you do not want to withdraw money from your retirement account!
In a nutshell, an emergency fund is a money you have set up specifically to assist you in getting by during times of financial difficulty. For that, create a savings account, where you will transfer any extra money you get.
Spending sparingly is a key component of achieving and maintaining financial security. Begin by keeping track of your regular expenses, then identify areas where you may reduce spending. Do not eat out, cancel any unnecessary subscriptions, and stop discretionary spending – in other words, assess your budget!
Have a Side Hustle
Having a source of additional income on the side, some sort of a side gig, whatever that job is, is a good idea. With job security so low, having more jobs means having more job security, which leads to financial security and career opportunities. Diversifying your income streams is just as important as diversifying your investments.
When a recession hits, even if you lose one source of income, you still have other job opportunities.
You may not earn as much as you used to, but every little bit helps. As the economy improves, you may emerge from the recession with a thriving new business.
It is equally as crucial as income diversification. If most of your assets are invested in stock market securities, a downturn in the economy could be disastrous for your finances. And it’s because of this that properly diversified investments are so significant.
Make sure your investments are distributed over various sectors and asset classes in your investment portfolio so that market fluctuations will not affect your losses and your losses won’t be as severe.
You can put your money in various investment vehicles to diversify your portfolio. Buying real estate, stock market, or multiple savings accounts.
You can diversify your income. The inherent risk of relying entirely on one employment for all your income is that if the economy collapses and you lose your work, you will also lose your single source of income and your ability to meet all your financial responsibilities.
Having several sources of income can be quite beneficial. You have other revenue sources to rely on to assist keep you afloat if one source of income starts to decline or is completely removed. Gaining a second job isn’t always necessary to diversify your income. You can always rent something you own or even start selling DIY products.
Pay Attention To Your Credit Score
Your credit score will remain high if you make your payments on time, keep your oldest credit cards open, and maintain a low debt ratio to available credit.
During a recession, the economy drastically falls when jobs and money are scarce. Those high debt payments will add to an already tight budget in your personal finance. Assess your financial situation and all of your payment obligations, and devise a debt-reduction strategy.
It can be difficult to manage debt repayments during a recession for everyday people, and this can cause your debt to spiral out of control and bring you even more debt.
Carrying large amounts of credit card debt is extremely risky because even minor changes in external factors can affect your ability to pay your debt. However, job loss or an increase in interest rates, combined with banks tightening credit limits, could change that.
Don’t Be Scared Of Investing
If you have additional cash on hand and want to change your asset allocation when the stock market or bear market is down, you might even make money by investing it in equities that are now cheap but have long-term worth.
Buy low, then sell high, or hold onto stocks long-term. You do not lose money; stock prices can fall – but the market always goes up.
There is a good quote, said by Saglimbene, that clarifies that investing during a recession is not a bad idea.
“One of the things we always coach investors and advisers to do is when you’re in the throes of either a recession or in a bear market, you don’t want to make outsized allocation adjustments until the dust settles. If you’re properly diversified, you’re weathering the storm. The worst thing an investor could do right now is to try to time the market bottom.”
In terms of investments, being prepared for a recession involves taking a long-term approach to your investment goals, diversifying your holdings, and remaining realistic about your risk tolerance.
Start Saving Up Now
Savings can help our budget during difficult times. Higher interest rates usually stop us from taking out loans and force us to manage our finances differently. Of course, you can invest in the stock or bond market.
The Infinite Banking Concept
The Infinite Banking Concept, commonly referred to as over-funded life insurance, is a clever method of using a person’s complete life insurance policy.
A whole life insurance policy is a permanent life insurance offering cash value and death benefit protection. The cash account’s balance is increasing tax-deferred, so until it is withdrawn, the gain is not subject to tax.
The initial death benefit sum and the premium are fixed with a whole life insurance policy. If the insured is still alive, the insurance will eventually become paid up, and premiums won’t be required.
The Infinite Banking Concept gives us complete control over the process of investing money in an asset. You borrow money at cheap interest from a mutual insurance company and take it out as needed. There are no restrictions on how you can spend your money; you are in charge of it – you invest in yourself.
Therefore, after taking out a loan, you repay yourself rather than paying a bank or other lender a lot of interest. The Infinite Banking Concept is frequently referred to as the process of becoming your own banker.
And it’s accurate since you’re doing your own banking; it’s created to mimic the conventional banking procedure. On the other hand, you are becoming wealthy as opposed to conventional banks, which benefit from loans and interest rates.
The Infinite Banking Concept’s full-life policy enables you to supply liquidity, generate steady returns despite rising inflation, and have a secure place to store your money amid inflation. Whole life insurance aims to increase total value through interest and dividends.
Even after you take out a loan, your policy’s cash value keeps increasing. The Infinite Banking Concept is ideal for a rough financial patch by giving you everything you need to save for retirement or have an emergency fund, a backup plan for when you do not have that extra cash.
We hope that after this article, you can finally take a deep breath and feel prepared for a recession. You can avoid common mistakes and find more financial opportunities with all the knowledge and helpful tips.
However, if you are interested in building your financial future while saving up for retirement, we would like to invite you to watch our masterclass and learn how to be your own financial support!