How to Survive an Economic SlowDown – 4 Things To Consider
If you are worried about an economic slowdown in the near future, you are not alone. Most people around the world do not have enough savings put away for hard times. If you find yourself living paycheck to paycheck, now is the time to think about how you can take steps to put away enough savings to survive a possible economic slowdown.
During an economic boom, you can put money in the stock market or housing market and you will see huge returns every year. A lot of millionaires are made during the boom cycles as the economy soars, however, many millionaires end up going bankrupt during a crash because they are over-leveraged with debt and don’t have enough reserves in their savings.
The key is to determine what level of risk tolerance you can afford at this stage of your life. If you are in your 20s or 30s, you have plenty of life ahead of you. At this point in time, you are able to take more risks than someone who is in their 60s and near retirement. Conversely, someone near the retirement age will need to ensure they don’t take any risky investments that they can’t afford to lose significant value.
This article is going to break down specific things that you can do to survive an economic downturn. Whether you are old or young, rich or poor, these tips apply to everyone.
1. Save, Save, Save
During the boom cycles, it is hard to save money. Banks don’t want you to save money because that means you aren’t borrowing money from them. Most interest rates you get for keeping money in the bank are so low, you can barely keep up with inflation at the end of the year.
If you find that you are unable to save money, you need to figure out what your monthly expenses are and learn how to cut costs. Do you really need to be going out to restaurants as often as you do? Give yourself a budget for food, clothes, and going out and stick to it. If you have a family, it is even harder to budget because you have a lot of unexpected bills come up.
If you currently go out to restaurants three times a week, try reducing that number to one. If you spend a lot of money on groceries per month, considering buying in bulk and planning your meals during the week.
One of the best ways to force yourself to save money is to set up auto transfers from your checking to savings account. This will ensure that you transfer a specific amount into your savings account every month without having to manually do it. By paying into your savings first, you will not feel stressed about spending the money that you do have.
If you set up the right savings account, you can earn up to 1.8% APY so that your money is not just sitting dormant in the bank. While that interest rate isn’t close to the 5-10% returns you can make on the stock market, you are guaranteed that money, while stock market can easily crash 30-40% with the right black swan event.
2. Recession-Proof Your Portfolio
If you have a lot of money invested in the stock market during a boom cycle, you can sit back and watch your money rise by 10% year by year. After a few years, you will have huge gains in your investments by holding your money in an index or mutual funds. You don’t have to be a genius investor to make money in stocks, just buy an index of the S&P 500 and you’ll make big gains during the boom cycles.
During major recessions, there are some stocks that do extremely well and there are other companies that perform very poorly. If you diversify your portfolio and purchase index stocks that track companies that outperform during slow economic times this can keep you safe during a market sell-off.
While companies that sell high priced items and luxury goods suffer greatly during recessions, there are lot more buyers at companies that offer lower prices like Walmart and Amazon. By keeping a diverse portfolio you will be able to ride out any bear market while taking advantage of major gains during bull markets.
3. Reconsider Making Large Purchases
If you think we could be heading into an economic slowdown, hold off on making any large purchases. Unless you have a huge bank account and are not worried about the market (you probably don’t need to finish this article), you need to remember that timing is everything when you make a purchase. During times of excess, buying a luxury car is something that may be appealing, however, as the economy starts slowing down, you need to be more conservative with your money.
Buying a new home during a recession is fine if you are buying near the bottom of a crash. If you bought a home in 2008 or 2009 you would have made great returns on your investment. However, if you are buying at the start of a recession of a housing crash, it is likely that you will end up losing money.
Unless you are purchasing a house that you can afford in a neighborhood that has steady housing prices for the past decade, perhaps hold off on buying that new home. Anyone living in a place like California which has seen real estate prices triple in the past decade needs to think twice before they buy a new home as the economy starts to slow down.
4. Look For Additional Sources of Income
Besides cutting down your expenses, one of the best ways to save money is to look for additional sources of income that you can make money from. Maybe you have an extra room in the house that you can list on Air BnB to earn a few hundred dollars per week by renting it out.
Otherwise to make money include doing things like filling out online surveys, taking part in paid studies and research projects, and adding a part-time job. Depending on your current situation, there are different ways that you can generate more income per month.
Obviously, if you are currently working long days, you might not have enough time to do work more. That’s why things like Air BnB can help increase revenue without creating too much work for you. Adding more monthly revenue will increase the amount of savings you can put aside every month. This is a great way to ensure that you are prepared for any long term slowdown in the economy.
When you plan ahead for the worst-case scenarios, you will never be caught off guard when those scenarios happen. Even though the economy is doing great right now, you can never be too cautious when it comes to planning for a slowdown in the economy. Just because we have been on a ten-year economic boom, doesn’t mean it will last another 10 years.
There will be moments in the future when there is uncertainty in the market and the economy is weak. Saving and investing for those raining days will give you peace in mind during the bull and bear markets. When the economy starts slowing down and your 401k starts to lose value, it won’t affect you as much because of your diverse portfolio.
By ensuring that you save enough money, invest in the right stocks, cut expenses and increase your income, you are setting yourself up to be in a great position in the future. No matter what happens in the market, you are going to be able to take advantage of any situation.