How To Prepare For A Recession Or Depression

How To Prepare For A Recession Or Depression

With life uncertainties and unforeseen occurrences, there is a constant fear of a recession or depression happening, and therefore you need to prepare for such, especially as a business.

In 2020, while the global coronavirus pandemic was making waves, there were concerns in many regions of an impending recession.

Those fears and concerns are not baseless.

While that disastrous pandemic was hitting hard on businesses, revenue was dropping and creating a strain on finances.

Due to this, many businesses were forced to lay off employees to stay afloat.

Likewise, there was a sharp increase in unemployment in many countries and a correspondingly sharp decline in the price of goods and services.

The signs were there, so glaring that a recession or possible depression was underway.

Many who were not prepared for an unforeseen disaster such as the covid-19 pandemic were left in shock.

Many people didn’t know where to go, especially when their businesses were adversely affected or lost their jobs.

It ultimately came down to the survival of the fittest.

Or should we say the survival of the most prepared?

Without a doubt, the best time to prepare for a disaster, such as a recession or depression, is before it happens.

If you have to wait for a recession to set in first before running around to get a solution, that is not being proactive but rather reactive.

That time, it might be too late to devise an effective way to come out of that situation unscathed.

Before we load you with the most effective steps to prepare for a recession or depression, it would be good to understand what those words mean.

How to Prepare for a Recession or Depression – What is a Recession?

A recession has been defined as a period whereby a country experiences a decline in economic activities and gross domestic product (GDP) drops.

This is usually over a period of time, say a few months or, more specifically, two or more consecutive quarters.

Such a period has a telling negative impact on the nation’s economy.

It can lead to rash decisions by businesses and an increase in the rate of unemployment as many businesses strive to cut down costs.

The nation’s income would usually drop at this time, and many industries might stop production and shut down.

Various factors are responsible for a recession: a financial crisis, an interruption in economic activities, or a natural disaster.

Due to the telling adverse effects of a recession on a nation, businesses, and individuals alike, it isn’t something to joke with.

Hence, the reason to be adequately prepared for an eventual one.

How to Prepare for a Recession or Depression-What is a Depression?

Do you know the depression that an individual experiences when he/she is faced with pressures and anxieties of life that make them feel down and discouraged?

Well, that is not the depression we are talking about here.

The economic term ‘Depression’ indicates an economic recession that has lasted for a very long time.

What that means is that you can rightly describe depression as a severe economic recession.

While a recession would usually last for 2 consecutive quarters or a few months, depression is an economic meltdown lasting for more than 3 years.

However, the duration for which the decline in economic activities lasts isn’t the only factor differentiating a recession from a depression.

Also, the magnitude of the economic downturn could indicate depression, as at such time, the GDP would fall by at least 5-10%.

Like in a recession, a depression is a serious time of difficulty for everyone, and as such, you should be prepared for an occurrence.

While we discuss how to prepare for this unfortunate period of economic upheaval, please note that we might use the words recession and depression interchangeably at times.

Whichever one is used, it’s important you already have a good picture of what we are talking about.

Causes of an Economic Recession or Depression 

Knowing some of the causes of economic recession or depression is essential to understand how to prepare for these economic hard times.

A recession does not just occur like a rainfall that progressed rapidly from dark clouds into a heavy downpour in minutes.

There are usually factors that contribute to the emergence or start of an economic recession or depression.

While you might be powerless as an individual or business entity to prevent these factors, you can identify them and be well-prepared for an impending recession.

Take a look at some of the factors causing economic recession/depression that has been identified:

Inflation 

Inflation is one of the factors responsible for the start of an economic recession.

This refers to a rise in the general prices of goods and services over a period of time.

This could result from an increase in demand for some products and services or an increase in the cost of production and raw materials.

Where there is inflation, the number of goods you can purchase with the same amount of money as before decreases.

This can, in turn, lead to a recession.

Poor Money Management 

Another factor that could cause an economic recession or depression is poor money management by the relevant agencies and parastatals.

Experience has shown that this has been culpable for some of the economic downturns experienced in recent times.

These range from taking questionable loans to engaging in illegal activities.

Over time, such actions or inactions as the case may be might plunge the country into an economic meltdown.

The Aftermath of a War

Some of the recessions that top countries have experienced in recent times have been after a major war.

Wars such as world war II were responsible for the recession that affected the united states in 1945.

Usually, the economic activities of a nation slow down after a prolonged period of war which destabilizes the economy.

A resultant recession/depression is often unavoidable at such times.

Increase in Interest Rates 

When the interest rates on loans are increased, it also simultaneously reduces the amount of money available for an individual or business to invest.

This is when it is said that there is a reduction in liquidity.

At such times, when there is less money to invest, people’s economic activity also drops.

Thereby leading to a recession or, worse yet, depression.

A Drop in Confidence Level in the Economy By Consumers 

There is likely to be an ensuing recession when consumers start losing faith in the economy and lose confidence in it.

Sometimes, people are of the notion that the economy is already bad, and because of that, they stop spending money.

The big investors might stop investing, and even the smaller customers stop buying goods and services.

This would cause panic, and sales will drop because even manufacturers will reduce production.

Eventually, there might be a resulting recession/depression.

Deflation

Just as inflation can cause an economic recession or depression, so also can deflation.

Deflation is the opposite of inflation, and it is a rapid decrease in the price of goods, commodities, and services.

When there is a deflation, the value of goods and services will generally drop.

At such times, the natural tendency of a buyer or consumer is to wait further for the prices to drop even more before they buy.

What ensues is a drop in demand for goods and services, and thereby leading to a recession.

A Reduction in Real Wages 

While nominal wages are the actual wages or salaries that a worker receives, real wages are adjusted.

It is the wages that have been adjusted regarding goods and services.

Simply put, it is what you earn in terms of the number of goods and services you can purchase with that.

Real wages are usually wages that have been adjusted regarding inflation.

If after this is done, there is a fall in the real wages, what people earn cannot compete with inflation rates.

This can, in turn, be a pointer to an impending recession.

A Crash in the Stock Market

When people start losing trust in the economy and believe that the economy is going bad, they pull out their investments.

This would subsequently lead to a crash in the stock market and a potential cause of recession or depression.

All these factors mentioned above have adverse effects on individuals and businesses alike.

Let’s consider what these effects are.

Thereby emphasizing the need to prepare for a recession or depression either as an individual or business owner.

Effects of Recession or Depression on Individuals, Families, and Businesses

A recession or depression is not favorable or advantageous, either to an individual, a business establishment, or the nation.

In fact, this unfortunate economic disaster has crippling and devasting negative effects on people who live in an affected area.

Due to this, you should be well equipped to prepare for such before it happens.

Some of the common effects of this are:

Increase In Unemployment 

One glaring and adverse effect of recession is an increase in the rate of unemployment.

What really happens during an economic recession is that many businesses’ structures and systems collapse.

This then results in economic failures for the businesses, and they are left with no option but to let go of employees.

If a particular business is in crisis and has to lay off staff, it might be easier for these to be reabsorbed into other functional and thriving businesses.

However, during times of recession or depression, businesses shut down completely.

Therefore, the rate of unemployment will increase.

The result is many people out of their jobs, scampering, looking for employment, and few companies hiring.

Fewer Investments 

It is only natural to hold on to the little money one has during economic meltdown or recessions.

Because of this, there are fewer investment opportunities, and even the ones that are available will lack investors.

This could further cripple economic activities and growth.

Reduction in Salaries and Income

We mentioned unemployment as one of the effects of a recession or depression.

However, certain businesses would still manage to steady the ship and stay afloat during such times.

That comes at a price, though.

Even when businesses do not lay off their workers, they cannot keep up with the salary structure.

There would be a reduction in the salaries of workers and a corresponding decrease in the income of individuals.

Those who are fortunate enough to still hold on to employment at this time are usually underpaid.

Low Standard of Living 

When income reduces, it also has a crippling effect on the living standards of both families and individuals.

There is little money to buy things we really want, such as quality food, housing, cars, e.t.c.

It might even affect plans for family holidays and vacations.

All thanks to the low standard of living resulting from the recession.

Lack of Business Opportunities

Another group of people who are usually adversely affected during times of recession or depression is entrepreneurs.

Because of the general lack of funds and a drop in people’s spending power, entrepreneurs are also skeptical about implementing new ideas and innovations.

Without these innovations, there are fewer business opportunities around.

Decrease in the Quality of Education 

The education sector also receives its fair share of issues resulting from a recession or depression.

Because there is a general reduction in income level, it becomes difficult for parents to send their children to school to get a quality education.

With that, you risk having children who grow into adulthood without the proper training and certifications they deserve.

Childhood Malnutrition 

It is also bad news for children who have to spend their formative years in the middle of a recession or depression.

Because of the general breakdown of the economy and lower-income, there is a risk of malnutrition.

This is because of potential food insecurity and/or scarcity ensuing from the crisis due to financial hardships.

How to Prepare for a Recession or Depression

Do you know the worst time to prepare for a recession or depression?

In the middle of the recession is.

On the other hand, do you know the best time to prepare for a recession or depression?

Before it even happens.

Thankfully, as we’ve noted before now, a recession doesn’t just happen.

There are usually some signs, signals, or should you call them pointers to an impending recession or depression.

As such, even before it began or gets worse, you can quickly and promptly put necessary measures in place to survive it.

In fact, you need not wait for the signs of an impending recession to start preparing for a recession or depression.

Here are some ways you can prepare even now for a recession or depression:

1Do Not Panic

In the midst of a natural disaster such as a pandemic, there is a rising fear of an impending recession.

At such times, there would be great anxiety and concerns from various quarters.

The media especially might be circulating news reports that spell problems and a great calamity for the populace.

When you are faced with this situation, it is not the time to let panic set it.

You would get a lot of advice and opinions on what to do to survive, but do not rush.

Anyways, if you take the pain of planning even before an impending recession, you shouldn’t have to bother.

2Build Up Your Savings Portfolio

One of the major highlights (albeit a negative one) of recession or depression is reduced income.

As discussed above, there is a surge in unemployment rates as many companies downsize to stay relevant.

Even if you are a business owner, the economic uncertainties and drop in economic activities will undoubtedly affect you.

Therefore, the more money you can lock up before starting a recession or depression, the better.

Now is the time to build up your savings portfolio or create one if you do not have one already.

You can even set an automatic remittance to your savings portfolio once your income hits your bank account.

That way, you are taking a vital step towards preparing for a recession or depression.

3Cut Out Unnecessary Expenses 

Another thing you can do to get yourself prepared for a recession or depression is to assess your budget frequently.

Are there expenses that are eating deep into your finances that you need to get rid of?

On the brink of a recession is the wrong time to start spending lavishly or extravagantly on vanities.

You need every little penny you can get, so stop throwing money away.

4Clear Off Your Debt Portfolio

Debts have always been a burden.

During an economic recession or depression, there is a great economic meltdown, the value of investments will drop, and you might even lose your job.

You do not want to face this period with a backlog of debts on your neck.

Therefore, it is important to clear as many debts as possible, if you can clear all, in preparation for a recession.

The more debts you pay off, the better your chances of navigating through this trying period unscathed.

5Get Multiple Sources of Income/Learn a Skill

As you already know, your employment might most likely take a big hit during a recession.

This is why it is essential to get multiple sources of income.

In addition to your formal employment, you can learn a new skill.

Then, if you happen to lose your job, there would be something to fall back on to keep you going.

6Don’t Stop Investing, Focus on the Long Term

There is a temptation to stop all investments when there is a possibility of the economy going bad.

If your first inclination is towards that, you cannot be blamed.

After all, a time of recession comes with great uncertainties, and it might be a poor decision to have investments running then.

However, this is a bad option.

Remember that stock prices will most likely drop during a recession, and it won’t last forever.

Therefore, you should have the courage to buy the dip with the full confidence of getting returns when things start looking up.

7Stock Up Cash

You would definitely need a lot of cash during a recession, especially in cases of emergencies.

Hence, the time before a recession is the best time to stock up on cash.

Also, if you are to take investment opportunities that come up, you should have enough cash to do that.

8Make Yourself Valuable and Indispensable 

The time after the start of a recession is not the time to add more value to yourself.

If you are to stand a chance of keeping your job or finding a new one during the recession, you must be valuable.

Therefore, spend time when the economy seems stable to acquire more training, abilities, and qualifications.

That way, when businesses lay off workers, you stand a better chance of being retained as you have proven valuable.

9Network 

Networking and expanding your circle can also stand you in good stead during a recession or depression.

Now is the time to meet with proven and experienced professionals in your industry to make connections.

Who knows, when the going gets tough, you might find their expertise, advice, and connections beneficial.

Conclusion on How to Prepare for a Recession or Depression 

A recession or depression is not something anyone would love to experience, in all honesty.

It’s a period of hardships and confusion, with most people unaware of what to do to survive this challenging period.

Hence, this is something you would want to want to avoid at all costs.

The good news, though, is that you do not have to suffer adversely during a recession if you are properly prepared for it.

So, do not panic, avoid taking on lots of debts, sharpen your skills and add value to yourself.

Do this and other measures we’ve discussed so far, and you would be preparing yourself to come out of a possible recession or depression unscathed.