How To Survive An Economic Recession

An economic Recession can lead to significant job losses, retirement savings cuts, and even home loss, posing lasting health and relationship issues. It's crucial to be well-positioned for these events, as they never minimize the effects of slowdowns.

If you're not well positioned for an economic downturn at all times, you could be risking everything. When a financial crisis occurs, it's no rare event for individuals to lose their jobs that have the illusion of stability. Their retirement savings could be sliced in half, and they could even lose their home to the bank. All of these could cause lasting health implications and troubled relationships. It's easy to forget about the times of misfortune when the economy has been performing well for an extended period, but there's never a point in time when the effects of slowdowns should be minimized.

Luckily, when an economic downturn occurs, this provides massive opportunities for those who have a high level of financial stability. This can provide them the opportunity to build incredible wealth beyond what they could have imagined. Learn how to properly prepare for unfortunate times; you can take advantage of opportunities as they present themselves.

Loosely speaking, a recession is a large decline in economic activity that lasts more than a few months. This could be caused by a variety of factors, including inflation when prices rise and the dollar becomes weaker, deflation when prices fall and the dollar purchases more, high interest rates, and lending problems. These issues typically result in higher unemployment, lack of consumer confidence, people losing their homes, and businesses going bankrupt. Due to these factors, the stock market typically plummets as investors panic, lose confidence, and pull their money from the market.

One habit that you must establish to improve your finances at any point in the economic cycle is to live below your means and spend less than you earn. The gap between your income and your expenses is what is used to invest for your future and pay down debt.

Unfortunately, though, so many people fall into the trap of continually increasing their expenses proportionately with their income, resulting in a never-ending cycle of barely scraping by. When they get a raise, that money is immediately allocated to a brand-new car or a larger home. When their tax return hits their account, it's already spent on a vacation.

The phrase “live below your means” might bring a few words to mind like boring or mundane, but there are so many positive changes in your life that will come about when you begin to do this. Did you know that the average millionaire has seven streams of income?

They don't rely on one single paycheck from their job to pay their mortgage, car payments, and all other bills with a constant worry of being laid off. When your income is diversified, you have less reason to worry if one stream dries up. When you combine living below your means with diversifying your income streams, you'll still be able to pay your bills during an unfortunate event.

Perhaps the best advantage of having multiple avenues that pay you income regularly is the chance of one particular income stream taking off. For example, an individual working a 9-to-5 job begins a side hustle detailing cars on the weeknights and weekends.

The car detailing business turns out to be a hit with customers lining up for services. It ends up being a much higher hourly paying job than working 9-to-5. They're now able to quit their full-time job and focus on the detailing business with double or triple the annual income that they were being paid at their main job.

Paying off debt only makes sense in some situations. To put it simply, it makes sense to pay off high-interest debt quickly while making minimum payments on low-interest debt. Instead of taking every extra dollar you have and eliminating the low-interest loans as quickly as possible, that money could be invested to earn more interest than you're paying.

Ask yourself if it would be wise to invest extra money that could earn a 10% return instead of paying off debt with a 3% interest rate. From a mathematical standpoint, this makes sense, but some people ignore the fact that your monthly needs are going to be incredibly low when you have very little to no debt obligations.

Think of how low your monthly expenditures are going to be when you have no car payments, student loans, credit cards, and even no mortgage when compared to someone who's drowning in debt. This puts you in a much better position in the event of a recession and the potential risks associated with an economic blow. Never mind the fact that you're going to sleep much better at night.

How many purchases have you made that you've later regretted? That car you bought brand new that's now dented, having frequent mechanical issues, and is worth practically nothing. What about that timeshare that was pitched to you while on vacation or the extravagant wedding with 300 people, you invited to marry your now ex-husband or wife? There's nothing wrong with spending money on these expensive things if they're important and bring you happiness, but the problem lies when people habitually make large and small purchases without blinking an eye.

Continually wasting money on things you could care less about a few days, weeks, or even months after purchasing them is guaranteed to drain your wallet. These meaningless, forgetful expenditures will have you wondering where all of your hard-earned money went when you lose your job or your retirement savings halve in value during a market crash.

Thinking twice before buying an expensive item or carefully considering whether or not you want to splurge will be appreciated by your future self, and you'll receive more joy from each dollar spent by not making a purchase that will be forgotten shortly thereafter.

When the stock market crashes or there's a recession, it seems like things as you know it may be coming to an end. Will things ever get back to normal? It's worth noting that the average recession occurs about every four years and lasts about a year and a half, according to Acorns. The average bear market, or when stocks drop at least 20%, occurs about every three and a half years and lasts between nine and ten months, with the average stock market drop during these periods being around thirty-five percent.

In short, about every three and a half years, you can expect the stock market to drop an average of 35 percent. But not to worry because it tends to recover in less than one year. It's always unnerving when your investments lose a large percentage of their value, especially when you're getting older, and replacing those funds would be seemingly impossible.

That's your hard-earned cash that's practically vanishing into thin air. But when you look at history and know what to expect, these events are much easier to stomach. Remembering that markets are not always positive will urge you to prepare your portfolio for such occurrences and stay away from anything you wouldn't want to own when setbacks do strike.

Maintain a safe amount of leverage at all times, meaning don't borrow more money than you'd be comfortable having during all market cycles. Buying stocks on margin seemed like a foolproof idea when the economy had been healthy for a few years.

But what about when things take a turn for the worse? Would you still consider that to be a good idea, or are you over-leveraged? What about your home equity line that enabled you to borrow against much of the value of your home, leaving you little to no equity?

You're able to make the payments easily now, but what if your income decreases? Borrowing money has potential upside, but you need to be extremely careful not to over-leverage, and considering each cycle of the market will help you do this.

The worse off the market or economy is, the better the opportunities are for profit, as Warren Buffett famously stated,

Investors who are well-positioned to buy assets at a discount are often handsomely rewarded when these assets reclaim their all-time highs. Buying the dip follows the basic investment principle of buy low, and sell high, similar to timing the market.

While timing the market completely can be extremely difficult, buying stocks when you see a sharp decline in prices to hold onto them for a very long time is a simple strategy. This is only wise to do if you have plenty of cash available to risk by investing, but for those who have extra capital to deploy, a recession could signal an opportunity.

It's incredibly easy to forget exactly how things looked during past recessions, especially for younger individuals who have little to no prior memory of them. When the economy is thriving and seemingly invincible, those bad times are distant memories.

Remembering these times and always being prepared for them will mean you're in a much better position to withstand an income interruption, or a major loss in your portfolio value, and even allow you to take advantage of incredible value in the markets. 

Compare this to someone who is ill-prepared and expects nothing but a perfect economy in a constant uptrend with their investments, who might lose their home, encounter major problems in their family, and many other detrimental issues.