Are you worried about the next recession? Recessions can be turbulent times of inflation, unemployment, and volatile stock prices.
This guide explores how to prepare for a recession. During recessions, investors can turn to gold to help protect their wealth.
Since the last major recession in 2008, gold has increased in value by 172.6%!
Keep reading to learn about some of the things you need to have to protect your wealth during an economic downturn.
What is a recession and what happens during one?
According to the National Bureau of Economic Research, a recession is when the economy declines over a few months.
This is typically marked by a decline in production and sales measured by gross domestic product and unemployment.
Recessions happen when the economy contracts due to consumers and employers cutting back. As consumers lose confidence in the economy, they spend less money.
In turn, employers layoff workers when revenue declines, increasing the rate of unemployment. Recessions can be triggered by a number of different events.
In the 1970s, the cost of war in Vietnam and the oil embargo triggered a recession while public health policies to curtail the COVID-19 pandemic led to a short recession in 2020.
The 2008 recession started as a result of volatility in the housing market.
Lenders had issued mortgages to too many borrowers with low credit and then traded mortgage debt in secondary investment markets.
When homeowners were unable to make their mortgage payments, asset prices fell and lenders began pulling back on credit.
That recession led to record home foreclosures and high unemployment as a result.
7 Best Things to Have During a Recession
Recessions happen often and it’s good to be prepared for when the next one occurs.
Invest in gold and silver
Investing in gold and silver has historically been a good way to prepare for a recession. They can be a hedge against inflation and are known as a good store of value.
Precious metals like gold and silver retain their value during periods of inflation and economic uncertainty.
In 2006, the average price of gold was $604.34 per ounce. By the time the recession ended in 2009, it was $973.66 per ounce.
Today, gold is around $2,378.01 per ounce.
Investing in gold and silver can help protect your portfolio from inflation while providing diversification away from businesses that may contract for a period of time.
Pay off debt
Debt can increase your exposure to economic hardship during a recession.
The more money you are sending to pay off debt each month, the less you’ll have to cover necessities or save in an emergency fund in case you unexpectedly lose your job.
Debt also exacerbates the effects of inflation. If you find yourself relying on a credit card to buy essentials like gas and groceries, keep in mind you’re making those purchases with interest.
The deeper you get into debt, the harder it’ll be to access credit later on. Debt utilization is an important factor determining your credit score and the interest you’ll be offered on future loans.
Pay off debt that is most important first. You don’t want to get evicted or lose your car if you need it to get to work.
Other debts like student loans and credit cards may offer hardship programs.
If you can’t pay off your debt before a recession hits, you may be able to pause payments for a period of time to get back on your feet.
Start a side hustle
When recessions happen unemployment typically rises. Having supplemental income can help you absorb the impact of a recession if you lose your main job and can’t find a new one right away.
It’s a good idea to start a side hustle well before a recession occurs. This can help you pay off debt while also allowing you to bolster your emergency fund.
Look for a side hustle that can help you replace lost income quickly. This might include freelancing, driving for a rideshare app, or selling used items on a marketplace like eBay.
Your side hustle can help you keep the lights on if the economy turns south and it could wind up turning into a viable business too.
Grow an emergency fund
Having an emergency fund gives you access to a pool of cash in case you lose your job. This can help cover essentials like gas and groceries while you’re looking for work.
It’s a good idea to have between three to six months worth of living expenses set aside for emergencies.
That means if your cost of living is $5,000 per month, you should aim to have $15,000 to $30,000 set aside in an emergency fund.
Park your emergency fund in a high-yield savings account. This is insured by the FDIC, ensuring you have access to your money during emergencies.
It will also generate interest, allowing you to grow your savings.
Build up your credit score
While inflation and job losses are hallmarks of a recession, one of the worst things you might experience is limited access to credit.
During recessions lenders limit how much they’re willing to lend. A poor credit score can make you too risky, limiting your ability to borrow money if you need it.
Before a recession hits, make an effort to improve your credit score. A good credit score is 670-739. Anything above 740 is very good and will usually get some of the most favorable lending terms.
Paying off credit card debt to reduce your utilization rate can help boost your score. Keeping old cards open can also help.
You can pull a free copy of your credit report to see how much debt you owe and begin developing a strategy to increase your score.
To check your credit score and utilization, download a free credit report at annualcreditreport.com.
Get a HELOC (if possible)
If you own a home your home’s equity can offer you some protection during a recession.
A home equity line of credit – or HELOC – is a line of credit that is based on the amount of equity you have in your home.
You only have to pay it back if you borrow against it. With your home’s value as collateral, HELOCs often come with favorable loan terms.
If you don’t have savings and find yourself unemployed, you might look to credit cards or withdrawing from your retirement savings to cover your expenses.
A HELOC can provide an alternative source of credit that protects your retirement.
Get a life insurance policy
A life insurance insurance policy is intended to provide loved ones with financial security after you die.
Having one in place can help stabilize your finances during economic downturns.
Depending on the type of policy you get, it may also accumulate value over time. You can tap into the cash value of a life insurance policy or borrow against it while your policy is active.
A life insurance policy can be another way to diversify risk while providing access to funds if you need it.
When is the next recession coming?
Recessions are an inevitable part of the economy. Throughout history there have been regular boom and bust cycles that resulted in economic downturns.
Even though another recession is likely, it’s hard to predict what could trigger it. The best thing to do is assume a recession is always on the horizon and develop a plan to prepare for it.
Reducing your exposure to risk by diversifying your investment portfolio and income streams is a good place to start.
That way if one sector of the economy is hit hard or you experience a job loss, you won’t face a total loss.
Pay attention to the news. Indicators like falling GDP or major geopolitical events like the outbreak of war could signal a recession is on its way.
Bottom Line
Recessions are inevitable. The best way to prepare for a recession is to assume the worst-case scenario could happen to you.
Diversify your portfolio by investing in a variety of assets and industries. Avoid putting all of your eggs in one basket.
Apply the same logic to your income. Diversify the number of income streams you have to ensure you have cash flow during a recession.
Take stock of your finances and get your house in order. Pay off debt and boost your credit score to give yourself access to credit.
If you don’t have an emergency fund, start setting money aside so you’re ready when the next recession occurs.
FAQs
What are the best recession-proof jobs?
The best recession-proof jobs are those that continue to be in demand despite economic downturns.
This includes healthcare professionals, utility workers, public safety workers, teachers, accountants, and those working in skilled trades like plumbers and electricians.
Does the stock market crash during a recession?
A recession and stock market crash often go hand in hand. Economic downturns that result in declining revenues usually signal poor performance for stocks.
While it’s historically always recovered, you can expect the stock market to fall at some point during a recession.
What causes a recession?
A recession is caused by two consecutive quarters of economic decline, typically measured by GDP or unemployment.
In the past oil embargos, bank runs, a collapse of the housing market, and a global pandemic have triggered recessions.
What happens to the real estate market during a recession?
During a recession, instability can negatively affect property values and lead to a decline in home sales.
This can lead to structural shifts in the economy such as an increase in renting or a decrease in demand for commercial real estate.
