What's the best preparation I can do for a recession?

For the most part of last year the talk about a recession has been on-going and admittedly, it can be scary sometimes to read and hear many such stories from media.

A recession simply means decline in economic activity, which instead of growing, economy is shrinking, this implies that job will be lost, income will be lower, and assets value will probably be lower, hence it affects us in a not-positive way. As such, the emotion of fear is understandable.

If recession is a ‘winter’ financial wise, is there anything we can help ourselves so that we are better prepared to weather through this supposedly challenging period?

It's difficult to say what the best preparation for a recession would be, as it depends on many factors such as your personal financial situation, your job security, and the overall state of the economy. In general, however, some steps you can take to prepare for a potential recession include:

Building an emergency fund

Having a savings cushion can help you cope with unexpected expenses and income disruptions during a recession.

Paying down debt
Reducing your debt levels can free up more of your income to put towards savings and other essentials during a downturn. If you have any high-interest debt (eg. credit card outstanding), you should aims to clear these outstanding away from your statement as soon as you could.

Diversifying your investments
Consider spreading your investments across different asset classes to reduce your overall risk. Asset classes typically behave differently during different economic cycle. The advice of “not putting all your eggs in the same basket” is a gold standard on how you can reduce the risks and volatility of your investments.

Building your skills and network
Investing in your own professional development and networking can make you more competitive in the job market and help you find new opportunities during a recession.

Staying informed
Keep an eye on the economy and the job market, and be prepared to adjust your plans as needed.

One more thing…

One other thing to consider is how a recession might impact your household budget. During a downturn, you may need to cut back on discretionary spending and make other adjustments to your budget to make ends meet. It can be helpful to review your budget regularly and identify areas where you can save money, such as by reducing expenses or increasing income.

This little thing call budget can help you spend with a peace of mind and ensure you remain careful even though you are confident that the storm will not hit you.

If your expenditures are already very low, then you may be in a good position to weather a potential recession. However, it's still important to be prepared for unexpected expenses and income disruptions. Building an emergency fund and reducing your debt levels can provide a financial cushion, and staying informed about the economy and the job market can help you make adjustments as needed.

For survival…
Having an emergency fund can provide financial support if you experience a reduction in income or a loss of income during a recession. The size of your emergency fund will depend on your individual circumstances, but as a general rule, it's a good idea to have enough savings to cover your essential expenses for at least six months. This can provide a safety net if you lose your job or experience a significant changes in your situation.

If you experience a drop in income or lose your job, the first thing you should do is review your budget and determine how much money you have coming in and going out. This will help you identify areas where you can cut back on spending and prioritize your essential expenses.

Essentially, you want to understand your current situation well, before you begin to tackle the situation.

Next, you should tap into your emergency fund if you have one, and use those savings to cover your essential expenses. If you don't have an emergency fund, you may need to consider other options, such as reducing your expenses, borrowing money from friends or family, or applying for government assistance (if any).

You may also consider prepare a simple forecast to understand your next few months outlook better, having this may offer you a clarity on your cashflow situation. If you can see that your savings can sustain you over the next few months you may have a better state of mind to pursue the next opportunity.

Eyes on the future

Finally, it's important to stay positive and stay focused on your financial goals. A recession can be a challenging time, but by taking steps to manage your finances and stay on track, you can weather the downturn and come out stronger on the other side.