No matter how good things are, you should always prepare for hard times. You never know when something may happen in your personal life or in the market that could impact your ability to stay afloat. These are some ways to recession proof your finances so that you can be better equipped for hard times.
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Have multiple streams of income
Having one source of income can be risky in any circumstance but is exacerbated during a recession. If something happens to your one source of income during a recession it will be even more difficult to find another job because there will be more competition for work. Sometimes having two incomes in one household is enough if each person has a job but it all depends on your personal situation.
There are lots of different options when diversifying your income streams. You can have passive or active income streams. Passive income produces income for you without having to punch a clock. Examples of passive income are having an investment portfolio or owning your own business. Having passive income on the side can be something you can fall back on if you fall on hard times. Active income is income that is earned when you complete a job or service.
If you are a specialist in your industry, you can provide your services in multiple different ways outside you primary employment. Examples of secondary active income is a side gig, working on contract as a consultant. The only downside to this is that there is only so many hours in a day. This means that there is a cap on your earning potential for active income. With active income, you can serve a finite amount of people and eventually those services will have a price ceiling.
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Having a bare bones budget
It may sound simple but you need to know the exact amount you need for you basic living expenses. By setting a budget it builds discipline and forces you to live within your means. It will be easier for you to manage scaling down your lifestyle when you have a strong understanding of your finances. You will know what you can cut and what you can’t and will be able to make adjustments at a moment’s notice.
How much will you have at the end of the month after you pay for all of your expenses? If you have extra money, you should know exactly how you are putting that money to work. This can be by saving or investing it. This money should be put aside at the beginning of the month, not the end. If you wait until the end you will be more likely to spend it. Pay yourself first!
No matter what you decide, you should automate the process of allocating the funds. This will keep you accountable. By automating the transfer it will be less emotional to part with the money. If you are used to having extra money in your checking account it may feel like you are losing money. It will get easier once you see how much of a positive impact putting the money aside has on your finances! To make this process super easy and simple check out my Millennial Firestarter Toolkit which helps you keep track of all of your monthly expenses and financial goals!
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Draw on multiple skill sets
In hard times, it is important to evaluate all of the skills that you have that may be valuable to others. These may not even be skill sets you use in your main line if work. It could be something that you did in the past or something that you do as a hobby. Don’t discredit the things that you enjoy and are good at. These may be services that others may need and are willing to pay for. This can be something that you do to make extra money during hard times. You can also fall back on these skills if you need to look for a new job. Stay humble and be flexible.
Have an emergency fund
Having an emergency fund in place is extremely important. Not only will it give you peace of mind but it also gives you options. Oftentimes, people attempt to start saving money when they see the market start to decline. It is extremely difficult to save or react defensively during a crisis if you don’t already have a system in place. No matter what your financial position is, you should have cash on hand for emergencies or assets that you can liquidate at a moment’s notice. In the Millennial Firestarter Toolkit there is also a feature that helps you break down what expenses you will have in your emergency fund and how much you need to save.
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Avoid making decisions based on your emotions
Going through times of uncertainty can add a lot of emotional stress. If you have investments it is important to not make fear based decisions because of the economic climate. It is possible to build wealth during recessions. Evaluate your investments and make informed decisions on how to shield yourself from loss. This may include speaking to a financial professional or educating yourself on how to mitigate loss in the asset classes you are invested in. If you can afford it, you should definitely continue to invest during a recession since you may be able to find good deals.
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It also important not to let FOMO get to your head in times like these. If you have money to invest but don’t have all the information you need to make a sound decision hold off on investing. It is important to do your due diligence before entering into any investment. Don’t skip important steps because you see other people doing it or you are afraid you will miss your chance.
Have a diversified portfolio
If you are an investor you should be diversified. For example, if you mainly invest in stocks, you should be invested in multiple industries to mitigate your risk. This could mean that you own stocks in health care, consumer staples, technology, industrials, etc. Usually when there is a recession, some industries take more of a hit than others.
By spreading your investments over multiple industries you reduce your risk for loss. When evaluating your stock portfolio, don’t make rash decisions. Sometimes people decide to sell because they are afraid of significant losses. This is usually the worst time to sell. If you sell during a down market you are going to be selling low. Remember that you should always aim to buy low and sell high. This is why it is important to set metrics on when it makes sense for you to enter and exit a stock position. These parameters should be included in your investment plan.
By having set rules on how you will manage fluctuations in the market, it takes the emotion out of investing in the stock market. This is why it is really important to do your due diligence before purchasing a stock. If you are confident in the company’s business model and their numbers are strong, you get to buy these companies at a discount when the market dips!
If you are a real estate investor, you may choose to diversify by having properties in different geographic regions or by owning different types of property. For example you could choose to own commercial and residential real estate. Within residential you could have short-term and long-term rentals. There are plenty of ways to diversify. You just have to choose what is best for you based on the assets you own in your portfolio.
Final Thoughts
The purpose of this article is to show that there are steps you can take to prepare for hard times. It is best to work on these steps regularly so that you don’t have to scramble when something unexpected comes up. By using these methods you can maintain and grow your finances during times of economic strength or a recession.
Disclaimer: The content in this post is my opinion and should not be considered financial advice. I am not a financial expert or advisor. This content is for informational and educational purposes. For more details please visit the Disclaimer Page.
