4 Ways to Protect Yourself During this Recession
What is a recession?
A recession is a period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in Gross Domestic Product (GDP) in two successive quarters. Never mind the economic lingo, but we are in a period of decline in production. More importantly, consumption is also declining because your customers find it hard to buy more goods and services when prices are rising (inflation). This affects small business owners, and big ones too, who do not keep huge sums of cash.
A recession is temporary, but it can have long-lasting effects on your wealth – whether you are an individual or a business. It can wipe it off, leave your heart broken, and not in a position to ever recover your wealth. Therefore, the best thing to do when facing such a challenge is to protect your income and wealth during a recession. How do you do that? Here are four ways to protect yourself during a recession.
1. Slow down on expenses
Rising interest rates, inflation, and supply-side shocks have an impact on the prices of goods we buy. For a consumer, your buying power is reduced. Some of you may struggle to have extra money to save and build your retirement income. But we know we all need to. Build this retirement income and start a fund to help our children enjoy generational wealth. As for businesses, if consumers start feeling the heat, they tend to start living on basics, which affects many other businesses, especially those selling luxurious goods. If you are a small business involved in travel and luxury, you could be feeling the heat already.
Therefore, all the above affects income at a personal and business level. But you all must save some money and bulk up your retirement savings while investing some money. To do that, you can slow down on some expenses, especially travel expenses and other things such as beauty treatments. Instead of having your nails done four times a month, make it twice and save the difference. Do that on more items and increase your savings.
2. Have a budget
A budget is a panacea for wasting resources. In a recession, money is already scarce. Therefore, you should keep a budget to allocate your income efficiently and avoid overusing your income to the extent of not saving or having to borrow to cover the gap. I always discourage borrowing to spend. Nevertheless, the money you save today will sustain you at retirement, and if you can’t save, you may retire poor and be a burden to your children. So, a budget is an important tool when you look at things this way. It helps you see how much money is coming in, how much is going out, and how much are you saving or investing. Starting budgeting is not easy for many people. That is why I have come up with my own custom Personal Budget Spreadsheet that you all can use to get started. It costs $19.99 and is usable throughout the year.
3. Start a side business or side hustle
The reasoning behind starting a side hustle is simple: It helps you create a new source of income. Therefore, when others are suffering because the recession is eating into their incomes, yours will be growing. A good side hustle idea during a recession is one that is recession-proof. This means it is not being affected by the ongoing recession. People will still need it even when they have to spend their last dollar on it. Such examples include food, home and cleaning essentials, hair and beauty products and services, and pet care essentials, among others. Yes, pet care products are recession-proof. No one is going to kill their dog because it is eating too much. We love our animals, so we will keep feeding them even when the chips are down. So, now that you have heard about this, go straight into it. Do not dither while time is running out. Get your side hustle going and increase your income.
4. Get financial discipline
Finally, we all can use some financial discipline during a recession. You can get this through learning financial literacy. I like how financial literacy keeps popping up everywhere. This shows how important a tool it is. A financially literate individual will not continue living frivolously during a recession. They have the discipline to understand that now is the time to cut unnecessary expenditure and focus on essentials and just minimum entertainment.
In conclusion, I understand that economists will say that we are not yet in a recession, but signs are already upon us. In case you did not know, economists measure a recession by a successive fall in GDP, which has not happened since 2020. But we already have a negative one for the first quarter of 2022 (an annualized -1.5% GDP). If this happens again for this quarter, they will call it a recession. So, we are already one step in. The best way to be safe is to protect yourself because we do not know when this will end, given the ongoing pandemic and the war in Ukraine. Contact our office at (202)618-1297 if you need to discuss ways of protecting your business during a recession or if you need bookkeeping, accounting, and tax planning services.
Frequently Asked Questions
- What is the best thing to do during a recession?
It’s best to start budgeting during a recession. If you already had a budget, start adjusting it to reduce the money you spent on luxury items. This will help keep your cash flow strong.
- How do you personally prepare for a recession?
To best prepare for a recession, have money in savings and investments. But as soon as signs of recession come, it is best to invest in recession-proof companies (defensive stocks) that are not affected by the recession, such as food, beverages, medicine, or pharmaceutical stocks.
- Where is your money safest during a recession?
Savings accounts with your bank are safe. Your money earns interest therein, which could help keep up with inflation. You can also invest in the stock market, particularly in defensive stocks.
