11 tips for coping with an economic downturn
More and more experts are predicting an economic downturn, which could materialise in the coming months. We offer you 11 tips to prepare yourself for the possibility of a new crisis.
GDP growth in Catalonia came to a screeching halt in the first quarter of 2022, with an increase of just 0.1%. Are we on the verge of a recession?
With the major central banks raising or preparing to raise interest rates to curb inflation, the economy is guaranteed to cool down. And signs of a freeze cannot be ruled out. Even more so if we take into account the global energy crisis and the problems in supply chains. More and more experts point to an economic contraction in months.
With the abrupt downturn caused by the pandemic almost undigested, you would do well to prepare your finances to face a new journey through the desert. Here are some tips on how to avoid being caught off guard by the possible change in the economic cycle. If the pandemic has taught us anything, it is that everything can change drastically from one day to the next.
- Analyse your financial situation. Compile your assets, your monthly income and what part of your expenses are fixed and variable, as well as how much you could reduce your spending budget if needed. If you are an entrepreneur, also foresee what would happen if your income were to fall drastically.
- Reduce your debts. It is important not to face a crisis with a high volume of credit because your income could be reduced. Also, bear in mind that credit and variable interest mortgages are likely to become more expensive in the coming months. If you have a high level of short-term debt, it is better to renegotiate it so that it does not suffocate you. And if you are the creditor, try to speed up repayment to avoid default.
- Look for new sources of income. The more payers you have, the more likely you are to keep some of your income if a crisis hits. If you work as an employee, consider the possibility of doing occasional collaborations with other people or businesses, or even teaching.
- Reconsider purchases and dispensable expenses. A purely common sense measure is not to stretch your arm further than your legs. Assess what you really need and what you can do without in such a volatile context as the current one. And this is especially relevant for high-cost goods and services, such as a house, a car or a holiday on the other side of the globe.
- Increase the money available. It is always good to have a financial cushion, but it is especially advisable if times are lean. How many months will your emergency fund last if things go wrong? Adjust it to your circumstances. It is not the same whether you are an entrepreneur, self-employed or an employee entitled to unemployment benefits.
- Allocate part of the investment to liquid assets. It is important that part of our investments can be easily converted into cash. In this way, we guarantee that we will have money available if needed. In other words, it is a bad time to invest all your money in real estate. If there is a crisis, and you need money urgently, you will have to sell it off because real estate is not a liquid asset.
- Diversify your investment. This is a fundamental measure in any economic cycle. No one can guarantee what is going to happen in the economy or in a specific sector, so diversifying your investment always helps to reduce risk. It is about not putting all eggs in one basket. Crises always offer great opportunities to make money from what you don’t put in the emergency fund.
- Think long-term. Avoid letting the whirlwind of the market guide your investment movements. Learn to distinguish cyclical fluctuations from structural ones and focus your investment strategy on the long term. You don’t have to worry if the value of an asset that is clearly a future trend is reduced from time to time.
- Don’t get carried away by emotion. Just as you must avoid impulse buying, you must also eliminate emotion, if not panic, from your investment decisions. And accept sunk cost. Sometimes we are reluctant to get rid of a falling asset because we are psychologically unable to take the loss. Decisions must be made rationally and, if market logic tells us that the asset will continue to fall over the long term, it is better to lose half than to lose everything.
- Anticipate the different possible scenarios and make contingency plans. It is advisable to have plans A, B and even C depending on how deep the recession is and how hard it hits. This way, you will have a clear idea of what resources you have available to adapt to any circumstance.
- Improve your employability. Lifelong learning has already become a labour market requirement, but it is particularly relevant in an economic downturn, as companies tend to cut back on their workforces and competition for each position becomes more acute. Just keep in mind the large number of EREs and ERTEs that took place during the pandemic.
You will find everything you need to know about recessions in the following free course.
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