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Five tips on how to prepare for a recession

By John Brown
06 July 2022   |   4:42 pm
Are you worried that the global economy is in a looming recession? With the rising prices of basic commodities, you're not alone. Ethan Harris, the chief global economist for Bank of America, stated that although they wouldn't completely dismiss the likelihood of a significant recession, any recession won't be as severe as we anticipate. However,…

Are you worried that the global economy is in a looming recession? With the rising prices of basic commodities, you’re not alone. Ethan Harris, the chief global economist for Bank of America, stated that although they wouldn’t completely dismiss the likelihood of a significant recession, any recession won’t be as severe as we anticipate. However, the rising costs of basic commodities might still burden most. 

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Recession Versus Depression

Economic downturns are brutal for everyone. Whether you’re at risk of being unemployed or worried about where you’ll get the money to pay your bills, it’s important to know the differences between these terms as they vary in duration, scale, and severity.

What Is a Recession? 
You can characterize a recession as a downward movement in a country’s business cycle with a significant decline in GDP and employment. A recession causes decreased spending and income, which slows economic activity. 

It is also often felt in one country only, but with increased globalization, a recession in one country will likely affect other countries as well. Lastly, a recession doesn’t usually last as long as a depression—from several months to a year.

What Is a Depression?
On the other hand, a depression shows a more major downtrend in the business cycle. As a result, unemployment is more widespread, and there is a decrease in global capital and trade movements. 

Economic depression doesn’t just affect one country but reaches globally and lasts several years. For example, the only depression recorded in history was the Great Depression which occurred from 1929 to 1939.

What to Do to Prepare for a Recession

Now that you know how to differentiate a recession from a depression, let’s discuss what you can do to prepare for the former. 

Build an Emergency Fund.
Your emergency fund, otherwise known as the “rainy day fund,” is something you can fall back on if unforeseeable circumstances occur in your life. This includes sudden unemployment or illnesses. Ideally, your emergency fund should consist of three months’ worth of expenses at the very least. However, if you’re the breadwinner in your family, your emergency fund should at least be six months’ worth. Although it can be challenging to build an emergency fund if you live paycheck to paycheck, putting aside a small amount every month is an excellent way to start. 

Create a Budget.
If you don’t already have a budget plan, create one. Creating a budget will give you an overview of your cash flow to help you maximize your savings by looking for areas where you could minimize expenses. 

If you already have a budget plan, update it and observe your spending habits. Although it feels ideal to focus only on increasing your income, cutting back on your expenses is also essential, especially if you can’t find new income streams soon. 

Create New Streams of Income.
Another method to increase your savings is by creating innovative ways to earn extra money. This is also a great alternative if you’re not too motivated to cut back on your expenses. 

Moreover, diversifying your income stream will help you become more financially stable. For example, if you lose one income stream, you still have others to fall back on. 

Make Debt Repayment a Top Priority. 

Two ways you can pay off debt are to focus primarily on your smallest debt or tackle high-interest debts. Your income may not be as certain now as it will be during a recession, so paying your debts now while you have the financial capability to do so is imperative. 

Actively Develop Your Career. 
There are many things in a recession that you can’t control, but if you proactively develop your career, good things can happen. Start building your professional network now, so you have something to fall back on when times get tough. Develop your skills and experience, so you don’t start from scratch. Certain companies and industries can still thrive even during a recession. 

John is a financial analyst but also a man of different interests. He enjoys writing about money and giving financial tips, but he can also dive into relationships, sports, gaming, and other topics. Lives in New York with his wife and a cat.