We’ve had a nice run since the Great Recession of 2008. Stocks continue to climb. Unemployment is low. Housing has recovered and even thrived in some parts of the country.

The longer this economic boom lasts–history tells us the closer we’re to a recession.

When exactly that recession comes, I don’t know. Nobody does.

I do know that the time to prepare for a recession is today.

The Great Recession of 2008 was a rare economic event. But recessions (a period of  economic decline), are not so rare. They’re actually pretty common. But when things are going well for so long, we tend to forget this fact.

While the 8 strategies below will help you survive the next recession, they’re relevant for any economic environment. It’s just that when we’re  closer to a recession, they become more important.

Here’s what you can be doing to prepare:

How To Survive The Next Recession

#1) Control Your Expenses

See what I mean by strategies that are relevant in any economy?

If 2008, happened all over again, what expenses would be the first to go?

Premium cable? Memberships? Cars?

Would a change of housing be necessary?

The goal of budgeting isn’t to look at pretty charts. It’s to make sure your money is being allocated wisely. e.g. you want to know if you’re spending $500+ on eating out every month, yet derive no value from it.

I use the free software Personal Capital to do this. But you can use another free program such as Mint or a simple spreadsheet.

(Click here to sign up for Personal Capital and get a free $20 Amazon gift card)

Also, as you review your expenses, you may find that you’re spending a lot more money than you have to. For example, I get my car insurance through Metromile, which charges people based on how much they drive. Since I drive less than 10,000 miles per year, I end up saving quite a bit of money on insurance — and it’s just as good as what I had before.

#2) Eliminate All Consumer Debt

If you have non-mortgage debt, your priority should be eliminating that debt.

Not only is this a great investment when the economy might be at it’s peak–as it’s a fixed rate of return. The less fixed expenses you have during a recession–the greater your margin of safety.

#3) Know Your Margin of Safety

Margin of safety, you might be asking?

Warren Buffett best explains the concept by saying:

If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay; but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety.

It’s wise to take this same philosophy in many areas of your life.

For example, you should know the answer to the following question:

What would I do today if I lost my income, the value of my home cratered and my portfolio dropped in half? (or whatever your financial doomsday/worse case scenario may look like)

Say you had little cash in the bank, two brand new financed cars, skills that are becoming less in demand, a mortgage you were stretching to make as it is.

If that’s the case, you’re in for a rough road ahead.

Now, what if you had a fully-funded emergency fund, kept fixed expenses low, and had skills that are highly in demand in the marketplace.

Your doomsday is really just a small bump in the road.

#4) Build Your Emergency Fund

During a recession, cash in the bank is a good thing to have.

The most obvious reason being the larger your emergency fund–the more resilient you are.

But recessions can be a time for opportunity as well.

If home prices fall once the recession hits, it can be a great time to buy.

The same can be said about making a lump sum investment in the stock market.

You’ll be buying stuff on sale–due to the fact you were one of the few who saved up.

#5) Become Irreplaceable

Employers often use a recession as an excuse to trim their most unproductive employees.

Your goal is to bring a skill set to the table that’s irreplaceable.

This could mean taking on a new role, in addition to the one you have.

Another strategy is to get a certification, which may mean you’re the only one who can do a certain task.

It’s just as important to be liked. Employment decisions are sometimes more emotional than rational. So, it doesn’t hurt to volunteer to organize that next office party.

#6) Take On A Side Hustle Or Two

The more diverse your income sources the better.

This way if you lose one, you can look to another source to replace that income.

It’s much easier to go from making $1,000 to $2,000 with a side hustle then it is to go from $0 to $1,000.

So, start that side hustle today.

A few in-demand, recession proof, side-hustles along with some free resources for getting started are below:

Related Reading: 27 Side Income Ideas With Potential To Generate $10K A Month

#7) Review Your Asset Allocation

After the Great Recession there were a lot of stories about individuals not being able to retire as their savings cratered by half.

The typical scenario was–a couple in their 60’s lost half of their retirement assets and now need to work an extra ten years and maybe even more.

But one of the biggest lessons of that story was overlooked–these individuals shouldn’t have had so much of their portfolio allocated to stocks.

Take a look at the historical price of The Vanguard Target Retirement 2010 Fund Investor Share:

Vanguard Target Retirement 2010 Fund Investor Shares

 

This fund is a target retirement fund, so it’s allocated based on if someone was to retire in 2010. e.g. someone right around the corner of retirement.

Right before the recession hit, it’s price was around $21. At the absolute low point in March of 2009, it hit 15.22. By September of 2009, the value was back to $20 a share.

In an economic boom, it’s easy to want to be an aggressive investor. To put everything you can in stocks. But know that if an investment declines by 50%, it takes a 100% return to make it up.

The time is now to look at your asset allocation. Does it fit your risk profile and goals?

Not sure? I recommend taking Betterment’s Risk Tolerance Questionnaire (bottom of page) to learn more.

 

Related Reading:

  1. How To Invest $50 In The Stock Market: A Beginners Guide To Investing Like A Pro
  2. Betterment vs. Vanguard

#8) Sell Unused Assets

Imagine what happened in 2008–happened today. How would that change what you can comfortably afford to buy?

Are two new financed cars sitting in your driveway? Boats? RVs? Vacations?  A real estate investment you paid a bit more then usual but was justified at the time due to increasing prices?

While I don’t know if these assets have reached their peak, when a recession hits the market for these assets will decline.

If you couldn’t afford these assets in a recession, then the time to sell them is today.