We go through peaks and troughs in the economy, some years are blessed with an economic boom, with plenty of jobs, money to be spent, and things seem rosy and in other years an economic downturn. When the economy is in a boom, most people are feeling emotional highs and do not think about the downturn and prepare for the inevitable until it's often too late.
The current inflation was caused during the economic boom of 2020-2022 when the federal reserve printed a massive supply of money to help alleviate people affected by the economic shutting down. With strong consumer demand and shortages resulting from global supply chain problems, inflation became rampant.
The Fed is currently in the process of curtailing the inflation rate to a goal of an average of 2%, however, this will not be easy as inflation currently sits at 9%.
Unfortunately, high inflation is already starting to expose the economic downsides and as result, many companies are starting to lay off thousands of their workforce. Not only did companies over-hire to assist in the growth, but they are also preparing for a slowdown. When inflation is high, consumer pricing power decreases, and eventually, consumers purchase fewer goods.
When the prices were high due to inflation, as shown in the image "Effects of Inflation in Distributors," the first stage of a downturn is a decrease in customer purchases. At the same time, an increase in inventory cost, cost of service, and delivery cost incurred by companies cause a slowdown in economic growth. Consequently, companies are forced to lay off employees and lower prices causing inflation.
You may feel bad for all the people who lost their jobs, but until it happens to you or someone you know, most people do not prepare for this devastating scenario. The national indicators are not alarming the bell as the unemployment level is still flawed and low. People who have given up looking for work are not counted as the "unemployed," while many of the part-time employees or freelancers who barely make ends meet are treated as "employed."
However, savvy consumers are undoubtedly listening to financial experts and preparing. They know this is all a part of a healthy economic cycle because you can't have a booming economy forever.
In the chance that we do not face any pro-longed economic downturn, preparing for a recession would not hurt and you would only come out of this period even better financially than going into it.
Below I will talk about my tips and how I plan to set myself up for the potential 2023 recession.
1) Keep and Maintain Your Job
Although to some degree this is out of your control, you can limit your odds of the one being laid off by being an essential and valued employee. Also, building a recession-proof skillset or working for more recession-proof companies like staple goods companies could better insulate you from losing a job in a recession.
Also, this may be a good time to stick around your current employer who knows you already, than to change jobs where you will need to prove your value all over again.
2) Increase Cash Reserve for an Emergency
Emergencies happen and you cannot control them. This is the reason why you should hold 3-6 months of living expenses in cash. No one knows what can happen tomorrow, and without having an emergency fund, it will be hard to weather the hardships. When you have an emergency fund set aside, it gives you breathing room and time to figure out what you need to do without making rash decisions out of desperation.
3) Keep your Cost Down
As mentioned above in common expert advice, "reflect on lifestyle and priorities," I believe this means being cautious of your spending on unnecessary things and cutting down on extravagant routines. Not only would keeping lifestyle costs down help save money temporarily but once the recession hits, you won't need to drastically change your lifestyle.
4) Don't get into Debt with Big Purchases
When recession hits and your income stream decreases or is eliminated, paying back on the expensive car that you purchased during the boom cycle becomes the last thing you want to think about. This may cause you to default on the loan and lose the car and the equity that you've already built. This also means reducing consumer debt and paying off high-interest debt to minimize your exposure.
5) Diversify Income Stream
By diversifying your income stream, the loss of one income can cushion loss in other areas as you have alternative sources of income to rely on for the time being. Putting all your eggs in one basket isn't a good option for anything and it applies to your income stream as well. For couples who have a dual income, that could satisfy diversification as you can still rely on one source of income.
6) Be prepared to buy at a discount
Lastly, the recession is a time wealth is built and people become extremely wealthy. When people are forced to sell and liquidate their assets, others who have their financial situation in line and have built cash reserves, are able to buy things like stock, cars, and homes at a discount.
Also, companies drop prices on their goods to make any sales and reduce their inventory levels. This may be your time to buy things at discount that you've been wanting to buy for a while.
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