By Steve Rozenberg, Author of Building an Empire: Failing Our Way to Millions
What is a recession?
A recession means a significant decline in general economic activity. The macroeconomic term has traditionally been recognized as two consecutive quarters of decline, as reflected by gross domestic product (GDP) and other indicators such as unemployment.
However, the National Bureau of Economic Research (NBER) currently defines a recession as a significant decline in economic activity lasting more than a few months—normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
How can I prepare financially for a recession?
There are many everyday habits that you can implement to protect yourself ahead of time from the sting of a potential economic downturn or recession. Having an emergency fund, strong credit, multiple sources of income, and living within your means are all important tools that can help you get through a rough patch in the economy in one piece financially.
How can you make your investment portfolio more resistant to a recession?
In terms of investments, being prepared for a recession involves taking a long-term approach to your investment goals, diversifying your holdings, and remaining realistic about your risk tolerance.
The economy always has and always will have its ups and downs. It’s easy to coast through the good times, but how do you come out of the tough times unscathed? By preparing adequately, cutting costs, and making sure you still have some income coming in, you can emerge out of a recession just as strong as you were before it.
Prepping For a Recession
Create an emergency fund. If you don’t already have an adequate emergency fund set aside, specify a goal for how much money you want to add to it every month. Your fund should be kept somewhere that is not easily accessible such as keeping it in a savings account with your bank.
I would recommend during a downturn you keep six months’ worth of living expenses in reserve. This is especially important if you’re in an industry that gets hit hard by a recession (e.g., construction, financial services, food)
If you’re self-employed, you should set aside up to a year’s worth of expenses.
Pay off debt.
I am not a believer in having zero debt, especially when it is good/leveraged debt. But when a recession is coming it’s important to reassess all leveraged debt positions. Focus first on paying off your debt with the highest interest rate, which is usually your credit card debt. From here, pay off debts with lower interest rates as you can, working to lower your debt as much as possible. Reducing your debts will lower your monthly expenses and give you a better chance of surviving a recession if you lose your job or take a large financial hit or need to cut down on spending.
Money saved from not having to pay debt repayments can then be saved for your emergency fund or otherwise saved. Saved money can be invested in securities when their prices drop during a recession.
Create additional income streams.
In a recession, there’s always the chance that you might lose your job or have your business dissolve. Your primary focus should be to keep your current job and be ready to enter the market again for a new one if you lose it (keep an updated resume, investigate job opportunities, etc.). However, you can also increase your financial security by creating separate income streams. These can be a second job, an online business, or any form of passive income.
Even if you can only make an additional $500 or $1,000 per month, this extra income can help you get through a tough time if your primary source of income dries up.
Diversify your investments
During a recession, stock prices will usually fall dramatically, which means your investment accounts could be hit hard. While many companies, and their stock prices, will recover out of the recession, some will enter default and cause you to lose money. You can reduce the risk of this happening by spreading out your investments. Think about buying bonds, investing in securities from other countries, or investing in precious metals. These investments, particularly the last two, may move independently of the market and can protect your assets in a recession.
You can also look outside the market to invest in real estate, like land, apartments, or mobile home parks, that will usually appreciate in value over time, sometimes even through recessions.
How To Get Your Business Through a Recession
Invest in yourself and your business
The biggest mistake I see business owners make is to cut money on the one thing that actually makes them money. Investing in themselves. People are looking to you as the leader and the person who everyone is going to rally behind because you are the one that will make sure the business survives the downturn. This is not the time to let fear and emotions override proven success. That success-recipe is making sure you are doing your part and focus on how to bring the business and the team out of the recession stronger than when you entered.
Develop a risk management plan.
If you haven’t already done so, create a plan for what to do in the event of a recession. This risk management plan should include a set of actions you plan to take in the event that you lose business or customers due to an economic downturn. After all, it will be easier to think of what to do before a recession than in the heat of the moment as your employees are panicking and unsure of what to do. Make sure to create concrete steps to follow and then transmit the plan to other managers or partners so that they can follow it as well.
Your first course of action when hit by a recession should be to cut unnecessary expenses where you can. This will help your business stay in operation while you work out a more permanent solution or until the economy recovers. Look around to reduce overhead costs like utilities, administration, and wasted materials. You can also reduce your inventory levels so that your assets aren’t so tied up in products that may go unsold for months.
Cross-train your employees.
If you do end up letting some employees go, you will need others to step into their roles. This is why it is important to cross-train your employees for various roles within the business. This is best if done before it is needed.
Focus on customers.
You should focus all of your efforts on retaining regular customers and maintaining your relationships with them. Make sure that they know that their business is appreciated. In addition, keep your quality just as high as before, even it you’ve had to make other cuts around the business.
A recession is also a good opportunity to evaluate your customers. You may have those customers who are not profitable to work with. A recession is the perfect time to sever these relationships and seek new ones.
Don’t cut your prices
Many businesses turn to deals and sales when the recession is hurting them. However, doing so will only make it harder for customers to justify paying your regular prices when the recession is over. In addition, these lower prices can cut into much needed profits. The only exception is that you may want to offer one-time payment extensions or discounts to customers that are also having a hard time. Just be clear to them that you are only extending this service once.
Increase your marketing
One of the biggest mistakes business owners make is they cut the marketing of their business or product during a recession. That is the exact opposite of what you should do. Be more focused and intentional with your marketing dollars
Focus your advertising spending. Pull out of traditional advertising like television and radio and instead focus on improving your social media presence. Doing so is free, even though it might take more of your time.
Downsizing. Your other option to downsize. This can mean either reducing employees or moving to a cheaper location. Your remaining employees may have to work harder, but your business will at least be able to survive.
Be Real About Risk Tolerance
Yes, investing gurus say that people in certain age brackets should have their portfolios allocated a certain way, but if you can’t sleep at night when your investments are down 15% for the year and the year isn’t even over, then you may need to change your asset allocation. Investments are supposed to provide you with a sense of financial security, not a sense of panic.
But wait—don’t sell anything while the market is down, or you’ll set those paper losses in stone. When market conditions improve is the time to trade in some of your stocks for bonds, or trade in some of your risky small-cap stocks for less volatile blue-chip stocks.
If you have extra cash available and want to adjust your asset allocation while the market is down, you may even be able to profit from infusing money into temporarily low-priced stocks with long-term value. Buy low so that you can sell stocks high later or hold on to them for the long run.
Be careful not to overestimate your risk tolerance, as that will cause you to make poor investment decisions. Even if you’re at an age where you’re “supposed to” have 80% in stocks and 20% in bonds, you’ll never see the returns that investment advisors intend if you sell when the market is down. These asset allocation suggestions are meant for people who can hang on for the ride.
Diversify Your Investments
If you don’t have all of your money in one place, your paper losses should be mitigated, making it less difficult emotionally to ride out the dips in the market. If you own a home and have a savings account, you already have a start: You have some money in real estate and some money in cash.
In particular, try to build a portfolio of investment pairs that aren’t strongly correlated, meaning that when one is up, the other is down, and vice versa (like stocks and bonds). This also means that you should consider asset classes and stocks in businesses that are unrelated to your primary occupation or income stream.
Implementing these financial strategies will not only serve you well during a slowdown—they’ll also serve you well no matter what’s going on in the market.
Keep Your Credit Score High
When credit markets tighten, if anyone is going to get approved for a mortgage, a credit card, or another type of loan, it will be those with excellent credit. Things like paying your bills on time, keeping your oldest credit cards open, and keeping your ratio of debt to available credit low will help keep your credit score high.
When times are tough, maintain communications with your creditors to keep them happy by making arrangements to keep your accounts in good standing. Many lenders and businesses would rather see you continue to be a customer than have to write off your account as bad debt.
Surviving Through A Recession
Talk it over.
Sit down with every member of your household and go over your finances. How you resolve and differences in your approach to money will have a profound effect on your relationship’s chances of succeeding.
Now is the perfect time to set an example for your children, and show them how a family can pull together during tough times and everyone can chip in.
Invest in yourself
This is the time that you need to invest in yourself and become a new successful person. Remember whatever got you to this point in life leading up to a recession will most likely not be what gets you to the next level of where you want to go. The key is to learn from people that have already been through it and follow their guidance.
Keep the money flowing in
If you have a job, be an amazing employee. Now is not the time to slack. Show up early, stay late, and volunteer for projects. Pick up the slack for other workers; it’s what will happen when people get laid off, anyway, so now is the time to prove yourself. Look for ways to save your employer money, especially if you see your employer doing little things to that effect, like encouraging employees to turn off their computers. Try to quantify your efforts in terms of how you’ve raised profits and cut costs. Start networking so that in case you still get laid off, you have a safety net of contacts who might be able to help.
If you don’t have a job, find other ways to make money fast.
If you can, fit saving into your budget, even during a recession. You should make every effort to continue contributing to retirement accounts and college funds if you have them. When you come out of the recession, you’ll be glad you kept up with saving and your accounts will reflect the interest you’ve earned during that time.
Take a portion of your paycheck and move it to a savings account right after you get paid.
In addition, putting money into the stock market during a recession can be a wise move. If you buy stock in reputable companies when prices are low, you stand to gain a lot of money when they come back out of the recession.
In order to avoid recession depression, don’t let fear control you. An intense feeling of paranoia can make you an inflexible employee and also strain your relationships. Be thankful for what you have, and make sure to have fun. Instead of not taking a family vacation, for example, take a Staycation or exchange your home for free accommodation instead. Invite your family to think of creative ways to save money without skimping on happiness. Accept difficult times as a challenge for your fortitude and adaptability.
About the Author
Steve Rozenberg is an international commercial airline pilot who, after the tragedies of 9/11, was forced to realize that his “Safe and Secure career” was nowhere near as safe and secure as he had thought.
Steve chose real estate investing to be able to control his own destiny and create his own generational wealth.
Steve created the fastest-growing property management company in the state of Texas. Managing over 1,000 properties across 3 major metropolitan cities. Steve built the business up and created maximum cash flow positioning his company for a very profitable exit.
Along with growing his property management company, Rozenberg has flipped, owned, and wholesaled hundreds of single-family homes and apartment complexes across the US.
Parlaying all of the success from real estate investing and property management growth, Steve has gone on to be one of the most well-known influencers in the Real Estate Community. He is a top contributor to BiggerPockets as well as other top-level Real Estate platforms. He has been a guest and collaborated on countless panels, webinars, masterminds, conferences, and podcasts as well as being a published author.