For the most part it seems like we are heading out of this recession, it least the economy seems to be heading the right now. About a year ago IMF came out saying that we are in the midst of the worst global recession since World War II. Banks were failing, we had massive layoffs, governments were spending trillions of dollars and nothing seemed to be working. A year later things look somewhat better, stock markets have improved, companies are making profits and fear of job loss has reduced. One lesson we learned from this recession is that when times get though the only person you can depend on is yourself and you always need to prepare for worst-case scenario.
Here are eight tips to prepare you for the next recession:
1. Understand Recession
Recession is a normal part of the economic cycle, every few years we go through it and come back out. For some it may feel like it is the end of the world and everything is falling apart they forget that it’s a cycle. Understanding recession will give you some peace of mind and will take away the unknown factor.
2. Reduce Your Debt
Debt was one of the primary causes of the recession. If you have any consumer loans try to get rid of it to ensure you are still solvent. Do not get fooled by the low interest rates, it’s a trap. If you have credit cards you can call your institution to reduce your rates or transfer them to a new card with low rates, than pay it off as fast as you can.
3. Build Up Your Emergency Fund
It is astonishing to find out how many households do not have an emergency fund. We talked about emergency fund previously and how important it is. If you do not have one your first priority should be to build now. If you already have an emergency fund ensure that it is enough and add some more to it, this will give you at least some psychological support.
4. Cut Costs
Reduce your spending. Often you can reduce your bills if you call your service providers and ask for it. It may not always work but it is worth a try, in 2001 I was able to cut my cable bill by a huge amount and get extra’s permanently.
5. Balance Your Portfolio
Balance your portfolio on regular bases to stay within your asset allocation. The recession will bruise your portfolio, but do not panic. Do not be afraid of stocks if you have a long term view, recessions are the best time to purchase good long term investments.
6. Do More At Work
If you are worried about your employment make sure you work harder than you have in the past, make yourself useful to your company. Learn new skills and attend extra courses, the more you know the more valuable you will be to your employer.
7. Diversify Your Income
Diversifying your income can act as a buffer during a recession. If you haven’t already started this process, now maybe a good time to think about it. It’s basically having different income streams so in case you lose your job there is some income.
8. Continue With Your Investment Plan
If you are saving for long term goals continue to do so. Recession is a bad time to change your investment strategy, if you are a buy-and-hold investor continue to do so.
What did you do to get through this recession? How are you preparing for next recession?
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Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.