Recession is a word that sends fear into most people, especially entrepreneurs. The truth is that in some cases, a recession might be inevitable. So your best bet will be to be prepared when it comes. It is our goal to provide you with useful tips on how to be prepare when a recession strikes. How are the talking points:

• What is a Recession
• How a Recession can Affect You
• How to Prepare for a Recession
• Supplement Your Income
• Make Sure Your Loved Ones Are Taken Care Of
• Pay down debt
• Find Easy Ways To Cut Your Overhead Costs
• Create and Boost Emergency Savings
• Keep Investing
• Live within your means

But what is a recession in the first place?

What is a Recession

In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock).

Read Also: Secrets to Home Business success

This may be triggered by various events, such as a financial crisis, an external trade shock, an adverse supply shock, a pandemic, or the bursting of an economic bubble.

In the United States, it is defined as “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales”. In the United Kingdom, it is defined as a negative economic growth for two consecutive quarters.

Recessions are an economic reality. They’re also difficult to predict with any precision; they typically start before anyone even knows they’re happening and end before economists have enough data to know they’re done.

Moreover, they’re also usually pretty short. Since the end of the Great Depression, there have been 13 recessions in the U.S., and 9 of those were less than one year in duration.

But the individual impacts of a recession can be much bigger and longer-lasting, causing permanent financial damage to those who aren’t prepared to ride out the short-term implications and quickly get back on their feet. Millions of Americans still haven’t recovered from the Great Recession (2008-2009). Many never will.

Put it all together, and taking steps to protect yourself and your family from the potential consequences of a recession is not only important but necessary. Let’s take a closer look at what a recession is, how it’s measured, and what you can do — starting today — to make sure you’re as prepared as possible for the next recession.

From the points above, we already have an idea of what a recession is, and a few examples. Now it is necessary for us to also see some of the implications and how a recession can affect you, both business and personal life.

How a Recession can Affect You

It is important to note that the end of a recession is marked by a return to economic growth, not the full recovery of the economy to prerecession levels. In other words, people affected by a recession often continue to struggle long after economists have said the recession is over. Here are some of the effects.

Unemployment

Unemployment is particularly high during a recession. Many economists working within the neoclassical paradigm argue that there is a natural rate of unemployment which, when subtracted from the actual rate of unemployment, can be used to calculate the negative GDP gap during a recession.

In other words, unemployment never reaches 0 percent, and this is not a negative indicator of the health of an economy unless above the “natural rate,” in which case it corresponds directly to a loss in the gross domestic product or GDP.

The full impact of a recession on employment may not be felt for several quarters. Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment in a downturn.

After recessions in Britain in the 1980s and 1990s, it took five years for unemployment to fall back to its original levels. Many companies often expect employment discrimination claims to rise during a recession.

For example, the U.S. suffered a relatively mild recession in 1990 and 1991 that only lasted eight months and saw GDP declined a mere 1.4%. But while the economy returned to growth, unemployment continued to rise for a full 16 months after the recession technically ended, peaking at 7.8%. We saw a similar trend in the recession of the early 2000s when the jobless rate peaked more than a year and a half after the end of the recession.

Moreover, unemployment would remain at or above 9% for two more years and didn’t return to the prerecession rate of 5% or below September of 2015. That’s six years of high unemployment. In other words, even though the recession was technically over, a slow job recovery meant millions of Americans continued to struggle mightily.

Business

Productivity tends to fall in the early stages of a recession, then rises again as weaker firms close. The variation in profitability between firms rises sharply. The fall in productivity could also be attributed to several macro-economic factors, such as the loss in productivity observed across the UK due to Brexit, which may create a mini-recession in the region.

Global epidemics, such as CoViD-19, could be another example since they disrupt the global supply chain or prevent the movement of goods, services, and people.

Recessions have also provided opportunities for anti-competitive mergers, with a negative impact on the wider economy: the suspension of competition policy in the United States in the 1930s may have extended the Great Depression.

Social Effect

The living standards of people dependent on wages and salaries are not more affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals’ health and well-being. Fixed income benefits receive small cuts which make it tougher to survive.

So far in this article, we have been able to identify what a recession is and how it can affect you personally or business-wise. It is now very important for us to see how we can prepare ourselves in case of a recession. The few points below can help you greatly.

How to Prepare for a Recession

Supplement Your Income

If you truly are worried about tough economic times ahead, then you need to do everything you can to insulate yourself. One of the best ways you can do that is by increasing your earnings in anticipation.

If you spend any time reading personal finance blogs or personal finance articles, you’ll see that there’s a fever around picking up a side hustle. But don’t overlook your most important asset: your current job. If you can put in a little overtime and work hard for a promotion, that may be a much more fruitful way to increase your income.

Make Sure Your Loved Ones Are Taken Care Of

If you have children, a spouse or other family members who rely on your current and future earnings, you need to make sure you have adequate disability insurance and life insurance.

If you have group disability insurance via your employer, make sure that the coverage is good enough. It’s often not. To make matters worse, if you have group disability insurance then you may lose coverage if you lost your job. Something that is not unheard of in an economic downturn. The same concern applies to life insurance you have through your employer.

When it comes to buying individual life insurance, term life insurance is likely your best bet. (If your children are young, consider a 20-year level term policy.) You can easily compare rates online.

Read Also: Effective Strategies to Help Your Business Copy and Recover From Coronavirus

Another reason to get a term life policy now is that you may not be as healthy in the future; it’ll save you a lot of money if you lock in lower rates now when you’re in good health.

Pay down debt

It’s crucial that you pay down any outstanding debt — more specifically, high-cost debt, such as your credit card balance — to create some breathing room in your budget.

Often, economic downturns lead to job loss. If you’re worried about job security, paying off your obligations might bring you more peace of mind.

Prioritize credit card debt, then turn to other types of loans, such as mortgages or auto loans. Student loans, however, have more favorable provisions, which makes paying them off less of urgency, says Greg McBride, CFA, Bankrate’s chief financial analyst.

But even if you’re not worried about losing your job in a downturn, it’s still good financial practice. A March 2019 Bankrate survey found that 13 percent of Americans aren’t saving more because of the amount of debt that they owe.

“Regardless of where we are in a market cycle, prioritize eliminating high-interest rate debt no matter what,” says Lauren Anastasio, CFP, a wealth adviser at SoFi, a personal finance company. “Being in a position where you’ve eliminated those types of high-cost obligations allows you to better prepare for other things financially. The more you’re able to put aside for saving and the less debt you have, it’s going to be available to you in case of an emergency.”

Use Bankrate’s tools to calculate a debt-payoff plan or take advantage of balance-transfer credit cards with zero percent intro APRs. These offers disappeared in 2008, Anastasio says, so they’re likely not going to be around when the next downturn comes.

Find Easy Ways To Cut Your Overhead Costs

We live in a day and age where having a good phone plan, solid WiFi, and plenty of content to watch on TV is a forgone conclusion. But that doesn’t mean you should overpay for it.

If you pay more than $50 per person for a cell phone plan you should consider switching to a low cost phone carrier like Mint Mobile or Cricket Wireless.

Another easy win is to identify big ticket purchases that you regularly make. For me, that is contact lenses. (Full disclosure: I created ContactsCompare.com to help you find the contact lenses you love for the lowest prices available.)

If you don’t wear contacts, perhaps your cable bill is begging to be trimmed down. You can use TheStreamable.com to find the least expensive live TV streaming services. These recurring savings will add up over time and have literally saved me hundreds of dollars annually.

Overall, one of the most important things you can do if you are living on your own is to live with a roommate to help offset your rent. You can save all of the money in the world on groceries and utilities, but if your rent is too high, you’ll sink quickly.

Create and Boost Emergency Savings

Job loss can also make it difficult for you to pay their day-to-day expenses, and this is one of the implications of a recession. So what should you do to prepare?

Beefing up your emergency fund — that is, the pool of cash that you reserve specifically for events like downturns — can make it possible for you to still afford your necessities while you search for a new position.

Even if you’re paying down debt, it’s important that you prioritize saving. Focus first on loading up your emergency fund with one month’s worth of living expenses. After that, pay off your debt and then focus on building up a reserve of three-to-six months worth of funds, Anastasio says.

“Everyone needs to have a cash cushion, even while they’re attempting to pay off high-interest rate debt,” Anastasio says. “It’s imperative because, if an emergency arises and you’re putting every dollar toward eliminating debt, you have no choice but to go back to credit cards to cover the expense.”

A high-yield savings account can help you earn more on the money you stash away. You can search online for the best account that suits your needs and lifestyle.

Keep Investing

When the stock market is falling and everyone is panicking, it will seem counterintuitive to keep investing. You have to remind yourself that it’s practically impossible to effectively time the market.

This means that to give your investments the best chance of outperforming, you need to keep investing regularly. An easy way to do this is to automate it so that it’s on autopilot.

You can do this by having a recurring transfer to your IRA account or brokerage account. You’ll also want to make sure that you continue to contribute to your 401(k), 403(b) or other employer-sponsored retirement accounts.

Make sure you continue to invest so that you are primed for success when the recovery happens.

Read Also: What to do when your Business Fails

Live within your means

Experts typically recommend spending no more than 30 percent of your net income (that is, earnings after taxes) on discretionary items. It’s a good idea to create a monthly budget to ensure that you’re living within your means and not overspending.

“You have to pay your rent; you have to pay your car insurance; you have to eat to live. Your groceries, your utilities — those are all going to be essential expenses,” Anastasio says.

“But dining out, vacations, cable — anything that you would potentially consider a luxury or a lifestyle expense — that’s discretionary spending.”

In conclusion, whether you are worried about a recession or not, the good news is that these seven tips will help you build a solid financial foundation regardless of how the economy is doing.

So what is next? Go and start working on them.

You’ll be glad you did.