The Russia-Ukraine war is now ongoing for more than 8 months and no one thought something like this would even happen in the first place. But to an already hit global economy, this war has aggravated the damage. Europe is now looking at some very cold winters and the possibility of a recession not only in Europe but in the US is also not unlikely.
The last time the world was hit by a recession was in 2008 when it was triggered in the US and the global economy has also felt its tremors. The recent crisis in Sri Lanka and China has shown the growing doom in Asia too but most economists believe that India will not be hurt too much by the fears of recession due to the robustness of its monetary policies and various other government measures to tackle the inflation. This brings us to a major question of what exactly is this term recession and how can one ensure its impact is muted. Given below is the meaning of the term recession and how can you prepare for a recession in 5 ways.
What is a recession?
An economy can go through various phases like an economic boom, recession, stagnation, depression, or recovery. These stages define and help in understanding the current state of economic conditions and the measures that can be taken to improve the adverse state. A recession is the opposite of a boom where there is a slowdown in economic activities like manufacturing, trade, and commerce, a general uptrend in unemployment, high inflation, and increasing trade deficits. These conditions result in a decline in GDP (Gross Domestic Product) and such situations for a continuous period of two or more quarters are usually termed recession.
Top ways to prepare for a recession
The state of recession in any economy is a cause of concern and requires action to be taken by the country’s financial institutions. For example, the RBI recently increased the interest rates again for the fifth time in 2022 by 35 basis points to be at 6.25%. Such measures are taken by the country on a macro level to tackle a recession or the possibility of a recession. On a microeconomic level or an individual level, the measures that can be taken by a person to prepare for a recession are discussed below.
- Set financial priorities by creating a budget and sticking to it
A state of recession or a possibility of one directly implies a loss of disposable income or a reduction in purchasing power. Therefore, the first step to preparing for recession should be creating a monthly budget and sticking to it. The monthly budget should include all the fixed expenses as well as have room for any emergency expenditure. One of the common mistakes often made by people while making monthly budgets is not making a fair estimate of their expenses or splurging when they have to tighten their purses. These mistakes should be avoided to create an effective monthly budget.
- Cut down on splurges
Chalking out a monthly budget is not enough. It is important to adhere to it too. Spending on extravaganza in times of recession is foolish as the priority should be survival in such a scenario. Therefore, people should cut down on their splurges or push them for a better time.
- Clear out high-interest debts
The interest rates in recession-bound economies are usually high. Countries raise their interest rates to combat inflation and the burden of such increased interest rates further reduces the spendable income for individuals. Therefore, it is important to clear high-interest debts at the earliest to reduce this high fixed cost. Defaulting on loans is not an option and should be avoided at all costs as not only will it increase the overall interest amount but will also damage future borrowing capabilities.
- Create an emergency fund
An emergency fund is a safety net that can help a person tide over any unfortunate event like a job loss or loss of a sole earning member, etc. An emergency fund has to be created at the earliest, preferably at the start of one’s career, so that the fund will have maximum time to accumulate and meet all the needs of the users.
- Set up alternative skills
These are dynamic times and the workspace is constantly evolving. Before the pandemic who would have thought that working from home would become the norm but today, even big companies like Microsoft encourage remote working. This new norm has also given the bandwidth to skill up on new skills and try new ventures like side gigs. Such alternate career options will ensure that in the unfortunate event of layoffs or inability to work in the primary career, there are set options available to a person.
- Create an indispensable space for yourself at work
Another side-effect of recession is the massive layoffs that all organizations from big to small will have to undergo. An easy option to avoid being part of such layoffs is by making yourself indispensable in the workspace. Being vital to the organization or a key team player will safeguard the job and keep one away from the axe.
- Review retirement accounts
Retirement accounts are crucial for any person and their backbone for survival in their post-retirement period. Many people tend to overlook this crucial part of their savings and investments in times of recession. If the investments that are part of the retirement portfolio are heavily dependent on market fluctuations then they would have taken a hit as well in the wake of poor economic conditions. Therefore, it is prudent to review the retirement accounts and ensure that there is no major reduction in the retirement corpus. It can also be a good time to adjust the retirement options to less risky ones if there is a possibility of an oncoming recession in the near future.
A recession is one of the many cycles that any economy faces at some point or other. So every person has to prepare for such situations so as to safeguard their interest and that of their families in such times. The important things to remember are to not scale down the savings by too much and at the same time cut costs anywhere possible to add to such savings.
A recovering economy is the next turn of events after a phase of recession when the economic activities are on the increasing trend and the economy, in general, is moving towards a boom.
In times of recession or is safer to invest in defensive stocks belonging to sectors like FMCG, steel, pharma, etc.
Businesses belonging to sectors like hospitality, travel, automotive and auto parts, and real estate are among the sectors that take major hits in times of recession.
Investment in debt instruments and government bonds are safer investment options for retail investors in times of recession.