Inflation has reached the high of more than 8% and seems like it will take some time to come down. While the US Federal Reserve is fighting the high inflation by raising interest rates and their plan is to raise interest rates till more than 4%. This has been affecting everyone and many businesses. The US economy has reported 2 consecutive negative GDP growth. Big companies have started laying off their staff. We are already in a recession and it seems like it is going to get worse in 2023!
Since we cannot control how the recession will be like, the key for us is how we can reduce our stress during the recession, survive it well and even emerge out stronger (and wealthier) when the recession is over! Here are some ways that you can explore.
1) Plan Your Expenses
If you haven’t done so, this is now the time to really plan out your expenses. First identify and differentiate your needs and wants. Then plan your finances to meet your needs and be very selective on spending on your wants. Managing your cashflow is important so that you can not only survive the recession, but you come out of it gaining the new ability to manage your finances or cashflow well.
2) Emergency Fund
More and more big and well-known companies have been laying off staff recently. I believe the smaller companies will follow suit soon in time to come. This means a lot more people will lose their jobs. Therefore, be prepared by saving up and leaving aside at least 3-6 months’ worth of expenses as an emergency fund. In the event if one were to get laid off, then the emergency fund will really come in handy to tide through a good period of time, while looking for another employment, with less or no stress.
3) Alternative sources of income
It is always good to have alternative sources of income to rely on when one loses employment. Similar to having emergency fund set aside, income from alternative sources such as, dividends, rental income, side hustle, will allow you to tide through the period of unemployment with less or no stress, while looking for another job.
4) Continue to DCA
The stock market is usually 6-9 months ahead of the event happening. This is because people anticipate ahead of the potential event happening and react to it. For example, if many anticipate a potential recession in 2023, they will start to sell their stocks ahead of time. Then when we are in the middle of the recession, these people will anticipate the recession ending and will start buying into the market again. That is why the stock market can strangely rally during a recession.
If you are an investor, be disciplined in planning out your finances, set aside some cash and continue to dollar-cost average into your investment. This is because no one knows when the actual bottom is but so long as you DCA, your average price will still be quite low. Set aside a bit more cash if you can so that you can accumulate more at really low prices.
5) Opportunity in a Crisis
As the saying goes, in every crisis, there will always be an opportunity. It’s only whether you can see that opportunity or not.
From how I see it, many people who are caught unprepared by a recession, will react emotionally when recession hits. People who sell away great investments irrationally at low prices will then make a loss. Therefore, we should prepare ourselves for a recession and when we see great investment opportunity at really low prices, we can buy and accumulate even more!
6) Zoom out
Yes, since it is impossible to catch the actual price bottom, unless you are really very lucky, chances are your investments will be in the red during a recessionary period. However, do know that we are investing for the long term, not just for a few years. Therefore, when in doubt, always zoom out and look at the big picture!
Remember, high inflation, rising interest rates and recession – they won’t last forever. So as long as we are prepared and leverage on great opportunity that we see, we will emerge out a lot better in the future.