How To Survive A Recession
Recessions are consecutive periods of negative economic growth caused by financial uncertainty, demand/supply side shocks or some combination of the two. They are a turbulent period in any nation’s economic history and often, a high percentage of the population tends to make poor financial decisions during this time. However, there are some strategies that the common man can use to mitigate recessionary damage on his household and himself.
1. Build An Emergency Fund.
One may ask what the indicators of a recession are. While there is a plethora of indicators to choose from, the easiest to monitor would be the ‘Confidence Index’ which gives an idea of a nation’s consumer confidence. Consumers drive demand and indirectly drive the economy, so any consecutive dips in this index should indicate a recession. Currently, the UK’s Confidence Index is at -28 in January 2021 compared to -26 in December 2020. Forecasts show that this indicator is bound to drop significantly. While this is no sure-shot way of predicting recessions, it does give a good idea of what one can expect.
Ideally, to bear the brunt of a future recession, start building this emergency fund – whose sole purpose is to curb monetary hardships during financial turmoil. By making small and periodic deposits, you have to be well-prepared when the storm hits. It is good to keep a reserve of about 3 to 6 months worth of your minimum living expenses which will act as a safety net.
2. Upskill Yourself.
Recessions bring colossal amounts of unemployment in the economy. The Great Recession in ‘09 brought peak global unemployment levels to as low as 10%. Stagnant revenues, increased costs and debt repayment pressures from creditors are some major reasons behind mass lay-offs. However, Tara Sinclair, an Economics professor at George Washington University, puts it best, “Even if you can’t build up a financial buffer, focus on making sure that you have the training and skills that are broadly going to be employable”.
While a university degree is inevitably important, specializations and certifications are more popular than ever. Coursera and the Corporate Finance Institute (CFI) are loaded with courses that give you the technical know-how to make you stand out. Currently, with universities and businesses shifting to a remote world, we find ourselves with more free-time. Spending an hour a day on a particular course can ‘recession-proof’ your job/income streams in ways that even insurance schemes cannot.
The very concept of investing during a recession may seem daunting at first. However, Buffett's words may convince you to do the needful, “Be fearful when others are greedy. Be greedy when others are fearful.” Are stock market and housing prices down right now? Turn towards commodities like gold that are less volatile to economic headwinds; its intrinsic value and inability to produce negative cash flows are what make it attractive. It is important to keep in mind that investing is only possible when the safety net of an emergency fund is put up. This way, one can invest without having to worry too much about a source of income.
Finally, the key to coming out stronger post-recession lies majorly in your decision-making. The financial panic generated during a recession can cause the common man to take hasty and uninformed decisions. Keep a cool mind and ensure that you intricately plan each and every move.