The risks of a recession have increased since the UK decided to leave the European Union (EU) in the recent referendum dubbed Brexit. When the UK finally leaves the EU, Britain will not enjoy the same trade and immigration benefits the country used to enjoy as an EU member. Furthermore, the UK has already started experiencing economic downturn which prompted the Bank of England to reduce interest rates for the 1st time since 2009 to stimulate the economy. Although the UK economy is still stable according to many economic experts, the risks of an economic downturn are high given the uncertainty resulting from Brexit.
So, how do you prepare for the worst?
To be able to prepare for a financial crisis, you need to understand what happens during an economic recession. All recessions have some characteristics in common. For instance, there is a rise in unemployment fueled by a decrease in overall output. Unemployment results in other problems such as reduced spending since people have less money to spend. Businesses also grow slower or experience stunted growth because of poor demand for goods and services. Many businesses fail during a recession.
Besides increased unemployment, stock markets also plummet since people barely have money to sustain themselves, so they start selling off their stocks. Real estate markets also suffer due to low demand. Most people don’t buy property during a recession because income levels have dropped. Those with property to sell either hoard the property because they don’t want to sell at low prices or sell at very low prices. This is precisely why it’s a great time to buy property during a recession.
In a nutshell, a recession may result in a job loss, debt defaults as well as a significant shrink in your net worth when your investment portfolio shrinks in value. So how should you prepare?
Step 1: Start by creating a worst-case scenario
One of the best ways of preparing for a financial crisis is predicting the effects of a financial crisis on your finances/lifestyle in the worst case scenario. This step is important for determining the amount of money you need to survive should you lose your job or business. Can you survive for 6 months, 1 year, 2 years, etc. without a job? How much money do you need to get by?
Step 2: Set up an emergency fund
Based on the information you collect in step one, you should start setting up an emergency fund. Your emergency fund should be able to cater for your basic expenses for at least 6 months. It is advisable to set up a fund that lasts you longer, however, 6 months is a good place to start.
Step 3: Balance your investment portfolio
If you have an investment portfolio, you should consider balancing it at this stage. Rebalancing your investment portfolio consistently is important for locking any capital gains you had made in certain asset classes when the economy was booming.
Step 4: Invest in your career/profession/expertise
As mentioned above, recessions result in a high unemployment rate. It is, therefore, important to invest as much as you can in your line of work to ensure you don’t become redundant. As employers look for ways of cutting expenses, redundant employees have a hard time staying employed during a recession. You must, therefore, go the extra mile to prove your worth. For instance, you should be willing to work harder for the same pay otherwise, you will have a hard time keeping your job.
Step 5: Find multiple sources of income
It’s also advisable to find more work to boost your income. As mentioned above, wages plummet during a recession. You may, therefore, be forced to work more to make the same amount of money you used to make before the recession. If you’re an employee, find alternative sources of income. For instance, you can find places to render your skills after work. You can also turn online for some great money making opportunities within or outside your field of work.
Step 6: Make adjustments to your lifestyle
You also need to make sure you live on less than you used to. Recessions are periods characterized by a lot of scarcity so you can’t afford to live in abundance. You should spend only when you have to. You can start by cutting unnecessary expenses i.e. using public transport instead of your car, eating home cooked meals instead of restaurant meals, shopping in discount stores, etc. You can also sell an extra car among other luxuries you can’t afford to keep.
Step 7: Renegotiate your debt
If you have major debt obligations i.e. small term loans like payday loans as well as long term loans like car loans, a mortgage that are increasingly hard to meet in the event of a financial crisis, you need to visit your creditors and negotiate for better terms. Most lenders are willing to help out their customers during hard economic times especially if you have maintained a good repayment record all along. Instead of waiting for a looming default, you are better off negotiating for better terms.
Preparing for a financial crisis isn’t a daunting task when you have clear steps to follow. The above information highlights the basics. To avoid leaving in fear, it is important to start an emergency fund as soon as possible. You also need to assess your living expenses, balance out your investments, make lifestyle adjustments and renegotiate your debt. You should also think of getting additional sources of income as well as working harder in your career or business. You shouldn’t rest until you have an emergency fund in place.