With the outbreak of coronavirus and the following market crash, it's only natural to start wondering how to prepare for the next recession. For reference, a recession is two or more consecutive quarters of negative GDP growth after a period of prosperity. A recession, according to the National Bureau of Economic Research, is "a significant decrease in economic activity across multiple sectors lasting more than a few months."
Follow these simple steps to be prepared for what's to come!
It's human nature to run and hide when you hear the stock market is taking a turn for the worse. But before you sell all of your investments in a panic, take a deep breath and don't act rashly. We've said it before, but we'll say it again because it bears repeating: trading is like being on a roller-coaster--initial ups and downs are normal. And no one wants to get off while the ride is still going!
It's crucial to have a diversified portfolio, but remember that market prices are always changing. Even if the value of your assets has decreased, you won't lose money unless you withdraw your funds. So don't take out your cash yet! Keep investing and wait for the market to rebound - stocks are currently on clearance. When it does recover (and it will), you'll be able to make back handsome profits from selling the stocks you bought at such a low cost.
Mobile apps can help you keep track of each debt account to see how much is owed and what the interest rates are. Focus on paying off debts with the highest interest rates, using most of your income. You may also want to pay down tax-deductible debt accounts, such as student loans, so you can get money back during tax season.
After you get rid of any unnecessary costs, try to increase your savings plan as much as possible. Your savings should make up 20% of what you earn, and "extra" costs like subscriptions and memberships should only be 30%. Once you've lowered your extra expenses, automate larger contributions to your emergency fund. If something happens and you lose your job or have car trouble, the money from your emergency fund will help keep things afloat until everything is sorted out again.
Although selling your assets is not recommended, if you do choose to do so, invest the money in cash equivalents rather than stocks and bonds. This way, when the market starts to improve, you'll have money readily available to purchase discounted stocks and mutual funds. Additionally, keep in mind that having a reserve of cash is always a secure investment--especially during unstable economic periods. Consequently, by increasing your cash reserves now, you're laying down a foundation for financial security later on.
For good reason, the typical billionaire has seven streams of income. Having various sources of income guarantees that you have more money flowing in. It also serves as a safety net in the event that you lose a source of income.
Is there anything you're very enthusiastic about? Is there anything you do that you are always praised for? Consider turning it into a second business to supplement your income. You might also explore a number of recession-proof enterprises.
If you had a 401(k) or other retirement plans during the 2008 financial crisis, you may remember your balance going down even though you kept contributing money from each paycheck. "Investing is like buying at a discount when stock prices are low," Sweis said, which might be worrying to some. However, if share prices fall and you continue investing, purchasing more shares with each dollar paid in contributions.
Although it is nigh impossible to know when the next recession will decimate the economy, being prepared for if (and more likely when) it does is of utmost importance. Even if by some miracle the moment never comes, you'll have gained enough financial intelligence to be set for life in terms of your finances.
