How to prepare for a recession

With economists predicting a severe recession, it’s time to get your finances in order.

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With whole industries shut down and people confined to their homes, a full-blown recession has been predicted by many economists. How can you prepare your finances and potentially even benefit from the likely tough times ahead? Here are three quick recommendations.

Deal with debt

Assuming essentials are taken care of, tackling any debt should now take priority over everything else. This starts with anything that charges a high rate of interest on the money you’ve borrowed.

If you’re really struggling, it makes sense to take advantage of ‘repayment holidays’ offered by banks. Alternatively, get some breathing space by moving your credit card balance to another provider that charges zero interest for a period.

Now look at your monthly outgoings. Will you really need that gym membership once restrictions are lifted? Did you watch every boxset on every streaming service, or can some subscriptions go? 

The point is not to make life unbearable and to retain the things that truly give value. 

Cultivate a second income

Many companies aren’t making a penny of revenue during the lockdown and may struggle to recover earnings once things ‘get back to normal’. This has serious implications for their employees.

Although the government has stepped in to provide some protection, the furlough scheme is still a temporary measure. Since we know not every job will be saved, devising a second source of income now might make things more bearable.

The gig economy isn’t perfect. Nevertheless, it can still provide a welcome income boost to those who’ve time to spare. Most of us have a skill or knowledge that we could put to good use, perhaps as a tutor. Why not sell unwanted possessions, or other items, on eBay for extra cash?

Get invested

But there’s another way to generate a second income: buying shares. The idea that a recession could also be seen as an opportunity sounds fanciful. However, I think this is exactly how long-term share investors should regard what we’re about to face.

Sure, markets don’t fare well in recessionary times (just call up a chart of the FTSE 100 from 2007 to 2009 for evidence of this). And this coronavirus-influenced recession will also feel different from those that preceded it. Never before have we been in a position where the earnings outlook for so many companies was murky. The recession may be mercifully short, but it could be very deep. 

That said, we’re an optimistic bunch here at Fool UK. History shows that markets always bounce back, regardless of the catalyst for an economic downturn. The old adage that “this too shall pass” has never felt more relevant.

So, unless the world as we know it is ending, putting spare cash to work in shares over the next few months could actually see you emerge significantly better off post-recession. 

As always, any purchases should be made with an awareness of how long you plan to hold and whether a particular investment is within your risk tolerance.

Those with little interest in the markets should probably gravitate to having a collection of low-cost funds they add to in regular instalments.

And while there’s potential for better returns from bargain shares, stock pickers should be even pickier than usual, in my opinion. Only high-quality companies with relatively sound finances should make the cut. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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