How to get recession proof?
By: Smriti Tomar
Tags: Money, Personal Finance, Economy, Recession, Investment

While we like to think of “the economy” like a static entity, it’s actually more like a living, dynamic ecosystem. It fluctuates unpredictably, sometimes unusually, and can look very different from one quarter to the next.

That’s why the risk of recession is always with us. And while the timing is usually an open question, we know it’ll never take as long as we’d like for the next one to kick in.

The US is now officially in recession. According to the World Bank, 90 per cent of countries will be in recession in 2020 — the worst in eight decades. According to most forecasts, the global gross domestic product (GDP) is expected to contract. And India will be in the same boat. Woah, too much in one go right, let’s break (and possibly crack) it!

What is a recession?

A recession is often defined as two consecutive quarters in which an economy shrinks. According to the century-old non profit National Bureau of Economic Research, a recession can be identified by clear signs and symptoms. It describes recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

This description makes clear that recessions are extremely disruptive to people’s normal lives and financial fortunes, causing everything from layoffs and unemployment to infalting prices and shortages.

All of these effects were also in evidence during the Great Recession of 2008, the worst economic downhill in living memory.

Few of these effects may show up in certain parts of the economy during what if often termed as “mini recessions,” wherein economic growth slows down but doesn’t entirely get sluggish. In 2016, for example, post demonetisation the Indian economy went through this type of slowdown. The period didn’t meet any usual definition of a recession, sectors like travel, real estate, e-commerce faced downturn, while on the flip side many other sectors like pharma, education, agriculture, energy and telecommunication remained unaffected.

Can we predict recessions?

As much as we’d love to be able to anticipate each recession, it’s difficult and debatable — if not impossible — to know when one is coming. Even seasoned economists aren’t great prophets on this subject. Take for example the May 2007 prediction from then-Federal Reserve Chairman Ben Bernanke that mortgage defaults won’t do major harm to the U.S. economy. That prediction aged terribly.

Just as it’s tricky to predict recessions, it’s also nearly impossible to know how (if at all) a recession will affect you personally. A recession might not decimate the value of your investments or result in you getting laid off. You may see rising prices, but they might not necessarily affect the prices of stuff you buy. Some people may skate through a recession unaffected while others feel deep financial repercussions. These things are inherently unpredictable, just like the market itself.

How to prepare for a recession?

Being prepared for when a slowdown hits means proofing yourself and your family financially if your current situation is forced to not so good change. Here are some specific recommendations:

Build your emergency fund

The first thing you can do to prepare yourself is to save up a substantial chunk of money which serves as an emergency fund. Experts recommend keeping 3–6 months of living expenses in safe and interest providing savings/investment account. But remember, this money is sacred, only touch during an unexpected emergency like losing your job.

A recession can compound the problems of losing a job because not only have you lost usual income but a sluggish economy may make it hard for you to get re-hired. If you do find new work, you may be forced to take a salary cut or work more hours for the same pay, which will result in monetary pressure unless you have savings to make up for that difference.

2. Examine your expenses

Do not get too comfortable, an emergency fund will only go so far to support you in case of a job loss or pay cut, it’s good to make sure you’re living as modest a lifestyle as possible before the worse happens.

Make it a habit to sit down (or with your family) and evaluate your spending to find areas where you can tighten the grip. Some items that may be on the chopping block are eating out, expensive clothes or gifts, extra spending on hobbies, and vacations.

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3. Pay down debt

Working to pay down debt when the economy is booming is equivalent to doing your future self a favour. You can start paying extra money while things are good to pay your debts off faster. Getting your debt payments under control is essential, since having good credit score will help you weather future financial mishaps.

A popular way of paying down debt is the “debt snowball” method, which entails paying off your smallest loans first to give you some early wins that can motivate you to tackle bigger battles. Another option is the “debt avalanche” method, which has you pay down your debts with the highest interest rate first, no matter its size, and pay your way down to the lowest-interest loan.

4. Gain employment and side-hustle skills

Let’s face it, a major concern people have about recessions is the potential for job loss. Layoffs are common when the economy goes downhill, and securing a new gig can be tricky when no one’s hiring. One good thing to do while the economy is normal is to pick up some in-demand skills or credentials to make yourself more qualified in case you need to look for a new job in a slow economy.

Another option is to pursue skills that can be used while freelancing so you’ll be able to find smaller jobs as a stopgap if your major income source dries up. Those skills can be used as a side hustle to earn extra income that you can stack away in your emergency fund or use to pay off more of your debt.

5. Keep investing

Go through your investment portfolio to ensure it fits the level of risk you’re comfortable with which in turn depends on your attitude and lifestyle as well as the age- those who are near retirement might want to be far more conservative in their investments than younger ones.

Once you’ve adjusted your investment risk, don’t stop investing during a recession. The market will get back on its feet, so it’s not judicious to stash all your money out at the first sign of downturn. Consider staying the course and staying in diversified asset mix even when the market falls.

All these actions if taken, will keep you in the best position possible when the next recession comes along. Boosting your financial stability and flexibility should be the center of your personal recession-proofing.

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