As a former investment analyst and commercial credit banker, I pay attention to the noise in the media about a coming "recession", not out of fear but out of interest. I immediately dismiss most claims about the latest mentioned in the news as the economy is displaying minimal signs of a recession.
However, with a decade long bullish economy, we can't be foolish in thinking one won't happen. Typical bull markets have an average of approximately four years. With that, it pays to prepare your home for a recession...pun intended.
Pew Research Center's Social & Demographic Trends Project released a study in 2010 following the world's Great Recession. The study reflects that of the 55% of adults survey, "they suffered a spell of unemployment, a cut in pay, a reduction in hours or have become involuntary part-time workers."
It is essential to learn from the past and prepare for the future. While it is not time to scream the sky is falling, it is recommended to start taking actions to make your home recession-proof.
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Below are 5 ways to prepare your household for an economic downturn or recession and how to survive during a recession, financially.
#1 Build a Long-Term Nest Egg
Recessions can cause a lot of hardships, and one of these hardships is the impact on the workforce. Companies experience a drop in sales or services, and with the lack of revenue coming in, typically the first go-to for companies to reduce or cut is its workforce.
It is common to see a halt in overtime pay or a temporary pause in hiring. Eventually, this may lead to a reduction in work hours or worse, unemployment.
Having a nest egg in place to fill the financial shortcomings or gaps in your household can help alleviate some stress and burden. The first step in this process is building an emergency fund. Eventually, the goal is to continue building up this fund to reach three to six months of livable expenses.
According to theBalanceCareers.com, "experts have estimated it would take very, very roughly one month to find a job for every $10,000 of the paycheck you would like to earn. So, in theory, if you were looking to earn $60,000 a year, your job search could take six months." Can you imagine having to survive off your savings for three months or four months? I had a person tell me one time he would pick up a part-time job delivering pizzas or something if that happened to him.
The issue with this mindset is most homes are living very frugal during a recession and not spending money. They are buying store-bought frozen pizza for $8 compared to $20 for delivery.
The length of time to secure a job will also depend on the type of job or career you want. For instance, a better paying job typically takes longer than low-paying jobs. Another helpful tip from CareerPivot.com, "If your skills or credentials are in overabundance or are not valued in your local region, you need to extend the length of your job search or expand your geographical search zone".
#2 Reduce Your Household Debt
The most common types of debt in homes are mortgages and consumer credit. Since the 1970s, consumer debt has continually climbed gaining momentum until the recession hit in 2007/2008. These liabilities started to decline as households rushed to pay down on mortgages or credit debt.
Paying down debt sounds terrific and is highly encouraged, but most homes will not be able to accomplish this when their disposable income starts to decrease.
Start working a debt payment plan with your spouse and make a target date to pay it down early rather than later. Most clients I speak with do not have a debt freedom date.
Typically, they use the date provided by their banker. What this is means is for every loan you have, there is a minimum payment due date and estimated payoff date. Make your own payoff date by working quickly and efficiently to pay down debt quickly.
#3 Learn to Live Within Your Means
This month, the average credit card for Americans totaled $5,331 per person with an average Annual Percentage Rate (APR) of 16.86%. But guess what? It isn't the millennial generation carrying the bulk of this debt.
According to CreditDonkey.com, it's the Baby Boomers and Gen X carrying most of this debt.
It is ubiquitous for households to swipe their credit cards for points and rewards each month. With the detachment of emotion of no longer using cash, the world shifts to a cashless economy, and the use of a credit card is primarily out of convenience, according to Psychology Today.
Many families get caught up in convenience that budgeting may seem irrelevant. By not tracking where every dollar goes each month, it is easy to fall prey to overspending. Living within your means is a must for every home because it keeps your expenses and income accountable while helps to track financial goals.
Take a tip from businesses. According to the Harvard Business Review, "Companies that prepare for a recession pull ahead during and after it." Is there something we can learn from the corporate world?
#4 Improve Your Credit Score
During economic downturns, not everything is doom and gloom. Last decade we witnessed many opportunities to capitalize on depreciated prices from homes to automobiles. While many real estate agents were struggling to make sales and purchases, those with capital bought assets for pennies on the dollar.
If you can build up your savings prior to a recession, you can take advantage of bargains when the economy is struggling to sell its assets.
This gives you the advantage of borrowing extra cash at low-interest rates, but you can only get low rates if you have a high credit score. This puts you in a very significant financial position to buy low and sell high. Look at how many wealthy investors made money from 2008-2010.
#5 Cancel Non-essential Bills
You can take specific measures this month to get closer to your savings goal or building your retirement. By controlling your expenses and spending habits, you can eliminate debt faster while focusing on your household goals.
One measure is to identify your essential expenses. Such expenses will include purchases or payments that are "must-pay." Must-pay bills are food, shelter, utilities, and debt payments. Once you have these expenses identified, you will find it easier to start pulling out costs that are non-essential and are "nice-to-have" bills.
Non-essential bills will include monthly subscriptions for entertainment (think Netflix, Hulu, Prime Video, HBO app, etc.), magazines, online storage subscriptions (DropBox, Apple, Google Drive), grocery services (Shipt, Huel, Misfit Market, Amazon Prime/Fresh), and many others.
Second, keep only the non-essential expenses that your family needs to have based on your situation. Ask yourself if it makes sense to have several entertainments paid subscriptions and can you survive with only one or two.
These types of choices are challenging in the short-term, but in the long-term, as long as you are putting that money elsewhere, you will reap the benefits.
With the media hype of a potential recession on the horizon, it isn't a matter of how but when. The economy will eventually face a market correction or temporary recession so it is time to get your financial affairs in order.
Just as a reminder to spark your curiosity...the Great Depression only lasted four years. Because the media likes to spark fear for its viewers to gain ratings, recessions only impact those not prepared for it.
Learn from the mistakes of the past and take action so your household can weather the economic storm successfully and fruitfully. These are the best ways to prepare for a recession.