Learn the basics of how to prepare yourself for a recession, economic loss, or potential job loss. Learn important steps and tips to help prepare and protect yourself for a decline in the economy, a layoff, job loss, unemployment, or other related event.

CONCEPTS

Use this video lesson on the topic to discuss the financial terminology and basic economic and related concepts of

• Recession
• Saving
• Spending
• GDP
• Debt
• Budgeting

PROCEDURE

Hand out the worksheet below (see the GET LESSON button near the bottom of the page).

Show students the video and have and have them complete the worksheet.  Then have a discussion about what things they and their family may do to prepare for a recession. Review the questions on the worksheet.

How to Prepare for a Recession

GRADE LEVEL

9-12th grades. Adult Education.

TIME REQUIRED

45 minutes

What is a Recession?

A recession can be described as a contraction of economic activity or when an economy shrinks. It is a significant decline in the economy and lasts longer than a few months.  In a recession , you often have weakness in consumer spending, employment, and industrial production.

When a region’s economy falls over several months or years, it is called a recession. These  periods are marked by a drop in the region’s GDP, or gross domestic product GDP, which is the total value of its goods and services.  Industries that were once profitable may suddenly lose their value. Consumers might see higher inflation or higher than normal levels of unemployment. Consumer confidence may also decline, which could lead to people being less likely to spend their money.

Recessions can have many different effects on families and individuals. Companies make fewer sales during periods of recession and the economy slows down or stops growing. Organizations may have to reduce costs by laying off large numbers of employees. This can lead to widespread unemployment. The hiring process slows down, which makes it more difficult for people to find work. There is also financial uncertainty, and in response, lenders may increase their lending requirements to make it more difficult to get credit.

However, there may also be opportunities. Recessions can affect different people in different ways. Some businesses, for example, don’t suffer as much from a downturn. These include basic food, repair and freelance businesses. You can weather most any storm by anticipating problems early and planning for the future. Here are some steps that will help you prepare for the unexpected.

How to prepare for a recession

Sometimes the discussion leading up to them is scarier than what the actual economic situation warrants. Although recessions can be very difficult financially, it is important to remain calm, be aware of your financial situation, and be ready to be flexible and resilient in times of need. Recessions will eventually end, just as they begin.

Prioritize purchases

Consider what you actually need and what you really want. Do you really need to go on a vacation, buy a car or eat out at restaurants? Reassess your spending and determine which items can be cut or kept. This could help you save thousands of dollars each year. Recession-proof living is possible by learning to live with less.

Make a list of your financial priorities

Uncertainty about the future and how things will turn around is one of the most difficult aspects of a recession. It’s crucial to know what your financial position is. These are the key questions to ask yourself when you assess your financial situation:

What amount of cash do you have?

What amount of debt (credit cards, student loans etc.) do you have currently?

What are your monthly expenses for basic living, including food and shelter, as well as transportation?

Are there any significant life events that will require you to spend a lot of money?

Next, it’s time to assess your current spending and plan for the future. You’ll be prepared for any financial emergency, such as a job loss, recession or other financial situation.

Make a thorough review of your finances and develop a monthly budget

Recessions can often cause people to lose their confidence in the economy. This can lead to lower job security, or worse, job losses. Preparing for any recession-induced emergency is important long before it actually happens.

To ensure that you are living within your means, it is important to create a monthly budget. This could be a great way to ensure you are successful in times of economic turmoil. You want your income to last as long possible and knowing how much money you have and where it is going can help you plan how to handle unemployment or other emergencies.

Write down everyone who you pay monthly bills. Check out how much cash you have in your savings or checking accounts. Find out which categories are your most frequently spending money. It is a good idea for you to look at your monthly expenses. This will help you identify what items are discretionary, and services that you don’t need and which are essential.

Reduce your spending, especially on big-ticket items

Once you have a rough idea of your spending habits, you can identify areas that you can reduce. These are usually not necessary purchases.  You should prioritize your essential expenses. Make sure to identify your monthly budget in order to survive in the event of a job loss. Reduce non-essential expenses like entertainment. It’s impossible to eliminate discretionary spending completely, but it is important to distinguish between your wants and needs. Find areas in which you might have spent too much and reduce that spending.

You have to pay rent, you need car insurance if you have a car, and you need food to eat. Groceries and utilities are essential expenses, but dining out and vacations, is discretionary spending.

Increase your savings

You can increase your savings by building your savings. Start saving now if you don’t have enough money to cover at least six months of your expenses. Make sure to build up your emergency fund before you need it. Keep as much money in your emergency fund even if there are job cuts or layoffs. When income stops coming in, you’ll need every penny.

Although tapping into your emergency fund should not be taken lightly, losing your job or having to live on less money is a reason to tap into some of the funds you have saved. It’s crucial to build your emergency fund once your financial situation stabilizes. Six months to one year of income is the minimum amount you should save.

Reduce your debt

You can reduce your monthly interest cost and have more income to pay for other things by paying off your debt. This doesn’t mean that you should eliminate all debt, but that you should concentrate on the debt that will improve your financial situation. You shouldn’t borrow more money than you can repay with a lower income in times of uncertainty.

If you are able to, focus on debt repayment.  It is possible that you are worried about the future payment of outstanding debts, such as student loans, utility bills, credit card bills, and utilities. You might lose your income and have to stop paying some or all of these bills. It’s important that you understand what bills you must pay.

You might not be able pay all your bills on time if you have lost income.  However, it may not be possible during a recession. You should prioritize how and when you pay your bills so that your cash is available to cover as many of your debts as possible. The more money you can save and the less debt that you have, the more it will be available in an emergency.

Take into consideration your career options, both now as well as in the future

You might also want to review your resume and other tools for job hunting ahead of time. Look for gaps in your work history as you go through your resume. Is there a place where you could get additional training or continuing education? It is a great way to invest in yourself by expanding your skills. Even if your job isn’t in danger, this strategy  applies.

High levels of unemployment are often a result of recessions. It’s important that you consider how difficult economic times can affect your career, and to have a plan in place for if you are laid off.

Some workers may find it beneficial to take on a side job such as freelance work. An extra income stream can help you build emergency savings and can be a great way to save money in the event that you are laid off.

Do not react in a hurry to change your investments

A falling stock market is often associated with a downturn. When times are difficult, companies often have difficulty hiring, expanding and investing. Worse, some companies might even decide to lay off workers.

Changing your investment strategy in a recession may be the worst thing you can do. This applies to all people, no matter how old they are or how close they are to retirement. Regular contributions and reinvesting all distributions will make those market fluctuations work in your favor. A recession may actually be a great buying opportunity.

You generally should avoid making changes that could jeopardize long-term financial security because of short-term economic events.  Be aware that markets are forward-looking. Investors can look ahead months or even a year to when the environment will be better.

Although a recession can be a difficult time, it is best to take proactive steps now in order to prepare. Keep yourself educated, to help you feel confident about your finances, no matter what the future may bring.

This material has been prepared for educational and general informational purposes only, and is not intended to provide, and should not be relied on for financial, tax, or accounting advice. You should consult your own tax, legal and financial advisors regarding your own situation.