It is no secret that the current economy has many people worried and wondering, is an economic downturn on the horizon?
With our national debt so high, inflation rising, a still-high unemployment rate, and many businesses struggling, it’s hard to know what’s ahead. Even the experts are struggling to predict what is ahead for the United States and global economies.
Among the most concerning headlines for me are the ones warning of pending economic downturn and financial doom. I’ve spent more time than I care to admit trying to predict what that means. It’s nerve-wracking to think through a prolonged period of uncertainty or even a significant collapse.
I’m a planner by nature. I like to have plans and backup plans. While I realize I have little to no control over what happens with the global financial system, I do know what I can focus on– my own home and family.
A Global Financial Crisis Doesn’t Mean a Personal Crisis.
Something I’ve found helpful to me when facing unknowns is to educate myself on various financial scenarios and think through how I’d respond. It satiates the planning desires within me and helps me figure out how my family will be okay, regardless of our environment.
As we look ahead into a very uncertain future, I’ve researched and put together some of the best tips I’ve found for surviving an economic downturn. While I hope that’s not something we face in the coming years, let’s get prepared.
Before we dive into tips to strengthen our financial lives, let’s first discuss the basics of an economic downturn.
What is an Economic Downturn?
An economic downturn or recession is a period of two consecutive quarters when the GDP growth falls below zero. The Federal Reserve will use this definition to determine if an economy is in recession.
Sometimes they are limited to a country, and occasionally they become a global financial crisis.
An economic downturn typically lasts a few months or more. Still, it’s not uncommon for recessions and downturns to last years before the economy fully recovers.
Reflecting on Previous Economic Downturns
We’ve enjoyed a long period of economic prosperity in the United States.
Though it’s been a while since we’ve experienced a prolonged financial crisis, many economic downturns have occurred throughout history.
To better understand the possibility of another downturn, it’s essential to reflect on history, as it often repeats itself.
Here are just a few history-defining financial crises we’ve experienced here in the United States.
The 1930s Great Depression
The Great Depression is what most people think of when they hear the term economic depression. As a single event, it was an economic downturn that lasted from 1929 to 1939.
The Great Depression has been studied and analyzed by economists for decades to learn how we can avoid another one like this.
While we’ve had some recessions since then, this one stands out as the most prolonged and profound period of economic decline in modern history.
To learn more about this massive financial crisis, watch THIS VIDEO that further explains the market conditions and ramifications of the Great Depression.
The 1980s Recession
The 1980s recession was a global event that started in 1980 and continued well into 1982.
It’s often called “the double-dip” because it initially lasted six months. It was followed by an economic recovery only to be met with another slowdown that lasted much longer.
To learn more about this economic downturn, watch THIS VIDEO.
The Recession of 2008
The Recession of 2008 is a global financial crisis that began in the United States and quickly spread to other countries.
It was due to an uncertain labor market, too-easy credit conditions, mortgage defaults, subprime lending practices, and risky investments. This all led up to what’s been called “the most severe recession since World War II.”
In hindsight, it seems so many factors pointed toward an economic downturn. The movie The Big Short provides a fascinating insight into the financial institutions that led to this crisis and the people who anticipated the recession before it happened. I highly recommend watching the movie to get a better idea of the conditions at the time.
The Pandemic Economic Downturn
While the financial markets worldwide experienced a dramatic dip in early 2020, at the beginning of the COVID crisis, they rebounded quickly. In fact, they shot far beyond where they were previously.
While we may have technically experienced a recession, many argue that we didn’t really experience a global financial crisis, as governments flooded economies with stimulus money. We may have experienced a high unemployment rate and stock market dips; however, things were roaring again by the end of the year with the massive cash infusion.
Are we headed toward a financial crisis?
This is an important question, and in many ways, it’s a difficult one to answer.
We can’t predict what will happen next because our current financial circumstances have never been seen before.
Given that financial trends tend to work in cycles, we are always inevitably headed toward some sort of economic downturn.
Economic data from around the world, capital markets and how they behave, unemployment rates, and geopolitical events all factor into the likelihood of a recession.
Another factor that makes things much more difficult to predict is government response. Bailouts and stimulus can take what might have been a swift economic downturn and kick the ball down the road into the future.
What does this all mean for the average person?
Your best bet is, as always, to stay informed and be ready for anything. Keeping an eye on your finances by balancing expenditures with income will help you survive any economic downturn coming your way.
The Basics of Surviving a Financial Crisis
When people face financial difficulties, they often turn to desperate measures that can have negative long-term consequences. Buying things on credit or taking out personal loans is not the answer.
This is why it’s important to know what the basics are for surviving a financial crisis. While it may be challenging to get through an economic downturn, there are some basic ways that people can survive and thrive during these times.
1. Live on a Budget- Like, Actually.
My husband and I have gone through Dave Ramsey’s Financial Peace University together (which I highly recommend). In it, he makes the distinction between “Free Spirits” and “Nerds.”
Nerds are people who love looking at budgets and spreadsheets, and Free Spirits do not.
In the course, he talks as though each couple has one Free Spirit and one Nerd.
After taking the quiz, it was clear my husband and I both fall into the Free Spirit category. Me being a Free Spirit may be surprising to people because I do love to talk about money. Still, my passion lies more in the fact that money can help you reach other goals that involve fun, like getting to travel, versus actually enjoying keeping up with the numbers.
All that said, neither of us likes or are naturally excellent at maintaining a budget. I kept an excel spreadsheet for years where we very loosely tracked our expenses. Still, there was minimal strategy or intentionality to it. Instead, we just tried to be frugal and smart with our spending.
Unfortunately, for most people, that doesn’t work, and it didn’t work for us. We were still spending more than we intended and not meeting our money goals.
That’s why we’ve since adopted using a zero-based budget, where you factor every dollar and “give it a job.”
Trust me; it took a while for us to get the hang of it. But, the effort is worth it.
It saves us a lot of money and takes the stress and confusion away from just “hoping it all works out” at the end of the month.
We love using Dave Ramsey’s Every Dollar app, as it’s super simple and syncs with our bank. I’ve also heard great things about the YNAB app.
Regardless of what system you use, learn to use a budget. Like, actually… no matter how much you hate it. If we’re bracing for a bumpy economic ride, think of a budget like putting on your financial seat belt. You just have to do it.
2. Cut Your Spending
This is a tricky point to make, because on the one hand, as a global economy, we need people to spend money to keep the economy going.
From an individual standpoint, however, if the economy crashes and you run out of money, you won’t be able to spend anyway. Therefore, if you don’t have a substantial emergency fund, it’s essential to cut as much as you can now.
Try as best you can to have at least three months of living expenses saved, and if you can get to up to a six months, that’s ideal.
It is recommended to put your money in a high-yield savings or money market account that you can access easily if needed.
Review your budget and think through what essentials are versus wants or likes.
Think through those subscriptions you don’t use much that auto-draft from your account each month.
Have you thought about selling one of your vehicles or items in your home? If so, do it now, while many people are still gainfully employed. If things do eventually hit the fan, many people will be going through their garages and trying to sell unneeded items, which will drive prices down lower.
Also, try negotiating with service providers.
Last year, after far too many battles with our internet provider about creeping up our rate each month, we finally decided to give them the boot and find a much cheaper yet high-quality plan.
We combed through all of our expenses and found that we were paying more than necessary to several providers. We hacked away at each bill, searching for where we could save, even if just a few dollars. Surprisingly, we saved over $300 each month by the time we finished our review!
Go through your list of bills, and see what costs you can lower.
Call to see if your providers have better prices available, or consider switching to a competitor if they have a great sign-up offer. Cell phone and internet providers consistently offer new deals and promotions. Competitive car insurance providers may offer a lower rate than your current payment.
Mortgage rates have also been at record lows.
If you have equity in your home, plan on staying put for a while, and could get a significantly lower interest rate, it may be worth it to consider refinancing. It has the potential to save you several hundred dollars a month!
It’s like preparing for a hurricane. I’ve never personally lived in a hurricane-prone area. Still, we’ve all seen news stories with videos of people boarding their windows and preparing their homes before a storm.
Take this approach with your budget, as it is much easier to shore up your weak areas when the hurricane is just off-shore versus when you’re in the eye.
And although many people who board their windows end up not taking a direct hit, it is better to be prepared.
If you shore up your expenses and save money, and the storm is more mellow than worse-case-scenario, then WONDERFUL! You have a nice chunk of savings in your emergency fund and ready to help you build wealth.
3. Be Smart About Food
One of the most common budget busters is food.
My husband and I have struggled in this area. We both love clean eating, yet often are short on time and need convenience.
We both have big appetites, and healthy food that fills you up can get expensive FAST!
When we reworked our budget a few years ago, I was appalled at how much of our money was bleeding away into the food category. We’ve since worked hard to change our approach to food spending, and while it’s still nowhere near perfect, we’ve saved over $300 most months with just a bit of strategy.
One of the easiest ways to cut your food budget is to opt for less healthy, grocery store convenience foods, but I wouldn’t recommend that.
There is so much research about food choices impacting both your physical and mental health. While “convenience foods” may help you save a little time and money in the short run, they can cost you tremendously in the long run.
For my family, we have found meal planning and batch-cooking very helpful. I’ll research affordable recipes at the beginning of the month and try to get all non-perishable items at once.
Some of the recipes, like soups or stews, I’ll cook all at once and freeze. For others, I’ll do much smaller grocery runs each week to pick up perishables.
Given that I don’t have to meal plan every week and grocery shop for all items (sometimes buying the same things I bought the week before), I save a lot of time! And by devoting time to it once a month, I am far more intentional and less rushed in following our budget.
If you are serious about cutting your budget down, research the absolute cheapest healthy meal recipes. For some good ideas, click HERE. While super cheap meals may not be very exciting, you’d be far better off eating ultra-cheap beans and rice-based meals than eating junk or blowing your budget.
There has been a recent surge, rightfully so, in the popularity of gardening.
Once you have everything set up, it is often far cheaper than buying organic fruits and vegetables at the store.
It also gives you some degree of control over your food supply.
If you are short of space, Google search “urban gardening.” You’ll find loads of articles and videos to help you grow your food, even if you don’t have much room.
If you still like eating out, which we do, learn which restaurants offer deals. Then, only eat out when you can get a special.
For example, we love fast Mexican restaurants. Recently, we got “Moe’s Monday” burritos for just over $5 apiece. $12 to satiate our desire to eat out beats the heck out of regular, $40 tabs we used to rack up regularly when we weren’t mindful.
4. Earn More
No matter how frugal you are, you can only cut so much.
If your income isn’t very high to begin with, figure out ways to earn more money.
One of the most popular topics for financial bloggers today is talk about side hustles. Google search the subject, and you will see all sorts of guidance and resources to guide you.
There are so many ways to earn money on the side, even if you have a full-time job or an odd schedule.
In today’s economy, Instacart and food delivery services lead the charge of providing steady, side-hustle incomes.
Stay-at-home parents can offer to watch additional children or pick up a freelance writing gig during nap time.
And as social distancing policies ease up, Uber, TaskRabbit, household chores, lawn maintenance, and many additional services allow you the opportunity to make more money.
As we’ve discussed, beefed-up savings accounts are the gold standard when preparing to weather an economic storm. Figure out ways to provide value in multiple ways to increase your earnings and savings.
5. Prepare Your Mindset
Beyond all else, prepare yourself mentally.
The most potent weapon you have in your arsenal should things take a turn for the worse is your own mind. Your ability to control your state will play a massive part in determining how you come out on the other side.
Statistics have shown substantially higher rates of suicide during recessions and depressions. It is difficult to control anxiety and emotions when there is so much unknown.
The economy has had a smooth ride for a long time here in America. The markets have experienced a steady rise for the last ten years, and in 2019, consumption was at an all-time high.
A sharp decline is a challenging blow for everyone. Change is hard, and changing habits is even harder.
The more flexible and willing to adapt, the stronger you will be as you navigate an economic downturn. And the more likely you will be to come out better on the other side.
To build your inner strength:
- Invest in some great books to help build you up, or find a few great podcasts that inspire you. When you feel yourself slipping into a funk, dive into this inspiring material and allow it to drown out the negativity.
- Download a mindfulness app like Headspace that will teach you to catch your breath and meditate.
- Find a few hobbies or workouts that instantly change your state. Even though I often have no desire to do it, going out for a run makes me feel so much better. And if I can’t find the mojo to run, a simple nature walk can work wonders.
The truth is, none of us know what is ahead in the financial markets and overall economy.
My husband and I have worked hard at shoring up our finances. We’ve redone our budget and sought to pour everything we can back into our savings.
In the best-case scenario, the economy will continue to strengthen over the coming years, along with our finances.
If we do, however, end up in one of the scary gloom-and-doom scenarios, you’ll be prepared to weather the storm in a house built of stone without fear of it all washing away.
Beyond financial survival, what’s next?
Thus far, we’ve covered the foundation of financial preparedness.
I’m a big money nerd. For years, I’ve heard finance experts speculate on when the bull market would end and many predictions that it would come crashing down.
I was in college during the 2008 recession, so honestly, I was already so broke that it didn’t make much of a noticeable difference in my life. Now, as a new mom with house payoff and college savings goals, significant changes in the economy matter to me a lot more.
Beyond gloom and doom predictions, I’ve heard many stories of people who built their wealth and got a jumpstart during an economic downturn.
How to THRIVE in an Economic Downturn
Now, let’s go a step further beyond mere survival and explore ways to launch forward during a financial crisis.
In the wake of an economic downturn, we all hope we don’t lose money and at least break even. But ideally, I hope to come out in a stronger position.
As Warren Buffet has said, be “greedy when others are fearful.” History is filled with “recession millionaires” or people who build their fortunes when times were terrible.
After much research and listening to millionaires, here are a few tips I’ve gathered for thriving and building wealth in an economic downturn.
1. Prepare in advance
Suppose you’re reading this when we’re not in an economic downturn, awesome! Save and prepare for the next time there is a slump.
Historically, significant recessions have happened about every ten years, give or take.
If things are good now, they will slump again in the future.
Having cash in hand allows you to pour money into the market when things are on “sale.” Save aggressively now so that you have money ready to put in for economic growth when everyone else is running away.
And if you are in a recession now but don’t feel you have much to invest for your economic growth, use that as motivation to prepare for future recessions.
If you still have several years before retirement, then you’ve got to think of your finances as a marathon versus a sprint. Run as hard and strategically as you can now while keeping a firm eye on 10 or 20 miles down the road. Build your savings, pay off debt, have cash on hand, and get ready for next time.
2. Don’t Panic
After seeing toilet paper shelves empty and the stock market tank in the first few weeks of the pandemic lockdowns, we all know panic.
In Facebook groups, I saw panicked people asking if they should sell off shares, even though the market was already down significantly.
When you see the stock market in a free fall, it’s tempting to sell in fear.
In most cases, it’s recommended to keep your money in the market and ride it out. Not everyone does that (hence the market slump), and they pay dearly in the long run.
Be smart and strategic with your choices, and don’t just make them based on emotion. Play the long game, and be okay that things might look ugly for a while.
Also, be smart with your purchasing decisions.
There are currently people sitting on 500 rolls of toilet paper, 97 bottles of hand sanitizer, and 150 tubs of Clorox wipes they’ll never use.
While it’s wise to get a reasonable amount of necessities in whatever environment causes an economic downturn, don’t panic and blow your money on a bunch of stuff you don’t need. You can instead use that money on investments that will pay off 10-fold in the long run.
3. Protect your income
If you still have a job, do everything you can to make yourself as useful as possible. Continue to build your skills and work to go above and beyond your basic job requirements.
If you start seeing company layoffs, volunteer to pick up responsibilities from eliminated positions. Rather than feeling relief making it through layoffs, fight for your job as though your employer could be evaluating another round of layoffs soon.
If you’re self-employed, brainstorm ways you offer more value to your clients.
Beyond the basics of maintaining your income, try to earn more money you can invest. Think through getting a side hustle and extra income streams. Even if it’s not glamorous work or below your typical pay grade, it adds up. People will still need lawns mowed, dogs walked, groceries delivered, virtual assistance, etc.
If you do get laid off or feel financially strapped, do all you can to find extra work and avoid dipping into savings. That money can otherwise be strategically invested to help you launch ahead in this season.
4. Free up money to invest
One of the biggest advantages of a downturn is that everything is on sale, including stocks and real estate.
You can get bargains on things that will costs thousands of dollars more when things recover.
I’ve heard many wealthy money experts say that they wait and hope for a downturn, as it’s when they make some of the most significant leaps in their wealth.
That said, you want to free up as much cash as you can.
Start by re-evaluating your expenses and see where you can cut. Do you budget? If you don’t…, start!
Evaluate where you can cut back, cut down, or negotiate lower rates so you can have extra cash to pour into the market and take advantage of deals.
Perhaps you can refinance your home for a significantly better rate? If you have credit card debt, can you refinance for a lower rate or, better yet, pay it off. In the last section, I discussed many ideas for freeing up money.
Taking advantage of rock bottom prices is one of the best ways to leap your net worth forward in powerful ways.
When things don’t look good in the market, many people pull their money out. They end up losing more money than if they would not have touched anything.
However, the wise investor will either stay put or, better yet, pour in more money.
You might be thinking, “how the heck am I going to get all that cash to invest?”
Here’s the thing. You don’t need “all that cash.”
Many people mistakenly believe that they have to have vast amounts of money available to make investing worth it, but that couldn’t be further than the truth.
Little bits matter. If you only have the $50 you saved by lowering your cable bill, start with that. $50 saved per month over 30 years is nearly $50,000! And that is just with a moderate 6% interest rate, not factoring you buying at a discount during the downturn.
Whatever you can invest, invest.
You’ve Got This
I hope you’re reading this article while there is still time to get your financial house in order. And if you’re reading this and you’re already struggling, I hope you’ve found the financial survival tips helpful.
The key to surviving and thriving during an economic downturn is being intentional with your money.
Don’t wait until the economy recovers to save like you used to, be proactive now! Investing in yourself and your future will help make this difficult time a little easier.