Many economists are predicting a U.S. recession over the next year. While Federal Reserve Chairman Jerome Powell has said that the U.S. Central Bank isn't trying to induce a recession, he has admitted that the rate hikes might lead to one. Here’s how to plan for a recession and prepare yourself in case a recession eventually hits the country.
Recessions are part of the economic cycle and there have been 11 recessions in the U.S. since World War II. The average recession since World War II has lasted for less than a year. The recession during the 2008–2009 Global Financial Crisis lasted 18 months while the 2020 recession only lasted a few months. The U.S., as well as the global economy, staged a V-shaped recovery.
What happens during a recession?
Before we start preparing for a recession, it's important to analyze what happens during a recession. We see widespread job losses, stock and housing markets typically crash, and prices for most non-discretionary products come down. Many households struggle to meet their monthly budgets amid the economic turmoil.
How to prepare for a recession both mentally and financially.
You need to be mentally as well as financially prepared for a recession. Recessions can't be wished away so preparing in advance can help. First, it's important to look at your monthly budget and cut down on any extra expenses. You might be spending on things that either you don’t need at all or only use occasionally. This could be a gym membership, a streaming subscription, or a magazine.
Also, if you haven't created an emergency fund, start taking baby steps towards creating one. The funds would help you survive the proverbial rainy day. You can start by cutting down on expenses that you can hold off for a year or more. Paying off your high-cost credit card debt might also be a good idea as you can save on the interest costs.
You can also look at ways to lower your monthly expenses. Some apps can help you find cheaper gas and groceries.
Look for ways to enhance your income.
If you have been living paycheck-to-paycheck, you might also want to look at ways to increase your income. There are several ways that you can earn extra income even during a recession.
Since house prices tend to come down during a recession, you can put your home-buying plans on the backburner before an impending recession. Conversely, if you're looking to sell your house, you might want to expedite before the housing market crashes.
Take a look at your investments.
While most stocks fall during a recession, some stocks especially cyclicals fall harder. While preparing for a recession, you can take a look at your portfolio and exit high beta stocks. Mature and profitable companies can survive a recession much better than loss-making companies. You can also pivot from growth to value stocks.
Value investing has been outperforming for a year now, and the trend is expected to continue for some more time. You can also take a fresh look at your asset allocation and ideally any money that you need over the next three to five years shouldn't be in stocks but in other safer instruments.