How to Recession-Proof Your Life

We cannot stop a recession from happening, but we can prepare for it by protecting our finances during a downturn.

1 min read
A demonstrator from the Occupy Wall Street campaign holds aloft a sign as the march enters a courtyard near the New York Police Department headquarters in New York September 30, 2011. [Photo by Lucas Jackson/REUTERS]

Many around the world remember how the Great Recession of 2008 wiped out trillions of dollars (estimated at US$2.4 trillion) from US retirement funds. Financial researchers in the US suggest that history may be repeating itself. Experts forecast that the coming recession could be even worse than the 2008 financial crisis.

We cannot stop a recession from happening, but we can prepare for it by protecting our finances during a downturn. Think of recession-proofing your life in the same way you would “hurricane-proof” your house. Recessions can cause devastation that lasts for months or even years.

The first step in recession-proofing your finances is to stay calm and avoid panicking. Our brains struggle to make smart, long-term decisions when we are in a state of panic.

What is a Recession?

A recession is a significant decline in general economic activity. Traditionally, it has been defined as two consecutive quarters of decline in gross domestic product (GDP) and other indicators such as unemployment. However, the National Bureau of Economic Research (NBER) defines a recession as a significant decline in economic activity lasting more than just two quarters, often including a decline in wholesale and retail sales.

How to Prepare Financially for a Recession

There are many habits you can adopt to protect yourself ahead of time from the impact of a potential economic downturn or recession. Building an emergency fund, maintaining strong credit, having multiple sources of income, and living within your means are all important strategies that can help you financially survive a rough economic patch.

How Can I Make My Investment Portfolio More Resistant to a Recession?

Preparing your investments for a recession involves taking a long-term approach to your investment goals, diversifying your holdings, and being realistic about your risk tolerance. Diversification is a key aspect of any investment strategy. Stocks, shares, and cash are common assets for diversifying your portfolio. Precious metals like gold, silver, platinum, and palladium are often considered hedges against inflation, as they can retain value during downturns. However, these options come with trade-offs, such as market volatility, storage costs, and accessibility issues.

Research suggests that the key to weathering a recession is planning for the worst-case scenario. Build up your emergency fund, pay off high-interest debt, live within your means, diversify your investments, invest for the long term, be honest about your risk tolerance, and monitor your credit score. Once a recession hits, it’s wise to look for side endeavors to keep money coming in.

Recessions are inevitable in our market economy and will pass, just as the seasons do. The stock market is cyclical, and a recession is part of this process.

Victor Cherubim

Victor Cherubim is a London-based writer and a frequent columnist of the Sri Lanka Guardian

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