In a nutshell:
Recessions come and go, but it is important you are prepared for a recession, and can capitalise on the opportunity when stocks are cheaper. Holding cash, having an emergency fund, and paying debt, are three ways to not only prepare yourself, but benefit from a recession.
- Recessions will occur regularly throughout our lives
- They are the best time to invest
- Holding cash means we can capitalise more on recessions
- Having an emergency fund means we can survive a recession
- Paying down debt is the best way to ensure the negative impact is at a minimum
- Hold Cash
- Have An Emergency Fund
- Pay Off Debt
- Final Word On Recessions
A recession is never a nice thought. However, booms and recessions are part of the natural economic cycle. Although some recessions are worse than others, which was shown through the 2008 Financial Crisis, throughout our lives we will experience several recessions – we need to accept this.
But, recessions are actually a good thing if you are an investor! This is when stocks go ‘on sale’, meaning we can buy more stocks with the same money.
Imagine all of Nike’s trainers go on sale for 50% off randomly ever 3-5 years – would you buy any? Of course you would!
This is similar to recessions in our economy. Stocks can drop 30-50%, sometimes even more, for a limited time and this is the BEST time to invest.
In this post we will be talking about 3 ways you can prepare for the next recession.
The best way to prepare for a recession is to increase the amount of cash you are holding.
Now, this doesn’t mean stopping dollar cost averaging into an index fund each month, or not being on the lookout for other investing opportunities. Instead, it means making a conscious effort to increase the ‘pot’ of money which you will use to invest.
What Can You Do?
Things such as starting a budget, or being stricter with your current budget, can help save you money each month. Starting a side hustle, or a second income stream, where you will dedicate all of the income earned to investing is another great way to increase your cash holding.
Essentially, you want to cut expenses and increase income. But, DON’T spend this money – instead put it to one side and promise yourself you will only use it to invest when there is a recession.
Have An Emergency Fund
This is different to holding cash. By holding cash we was specifically referring to having a ‘pot’ of money which will be invested when a recession hits.
By emergency fund, we mean having some money locked away that can meet any unexpected financial troubles. For example, say you lose your job, not a nice thought but it is possible at any time, especially during a recession.
If you do not have an emergency fund, well, then your pretty screwed…
Don’t Be Screwed!
How will you pay your bills, your mortgage, or anything? By building an emergency fund you will be able to weather any storm no matter how bad a recession is.
Aim for roughly 3-6 months worth of expenditure at a minimum.
Further to this, this is also important because when a recession does start you don’t want to be using all of your cash to survive. You want some cash that you have hoarded to invest, and some cash to use for emergencies. These are two separate pots of money – but mean you can stay afloat and capitalise on the recession!
Pay Off Debt
Paying down debt should be a priority anyway, but especially when preparing for a recession.
With a recession the last thing you want is a lot of debt, or high-interest debt. Say you do, combined with losing your job, and not have an emergency fund? Not a good thought!
When there is a boom everyone is borrowing, people spend a bit more, that’s natural. However, it is vital to keep debt as low as possible because debt + recession is not a formula for success.
Another element to this is that if you needed to take out a loan, for whatever reason, during a recession, by paying off debt and building a good credit score prior to the recession, you will get a better interest rate! Win-win.
Final World On Recessions
These are three of the best ways to prepare you for a recession.
Essentially, you want to be in a strong financial position. Money saved that is planned to be invested, little to no debt obligations, and ideally multiple streams of income so if you did lose your main job you would still be earning a small amount!
Most importantly, whilst recessions are difficult periods, try and view them as a positive. They are the best time to build long-term wealth!