How to survive an economic crisis
Many countries around the world are facing problems because of the coronavirus that is spreading globally and are afraid of a global recession. Central Banks are thinking of solutions to deal with the big economic problems that will be caused and preparing for a possible economic crisis. The stock markets are crashing, businesses and banks are already facing liquidity problems and as the data show, things will get worse the next weeks.
We are on the edge of a global economic collapse and many people, as it seems, are unprepared and it's the main reason that panic is everywhere, but most importantly, banks and governments are unprepared as they also were in 2008. Businesses and employees are worried for their expenses and their reduced income because of lockdowns and investors are seeing the value of their portfolio shrinking. The main question is, how well prepared are you for another economic crisis?
The most important thing, when a crisis is about to happen, is liquidity. Liquidity means how much money you have available right now. In order to survive an economic crisis, it is required to remain calm, have a good plan and strategy, not act too fast and definitely to have patience. What do we need?
1. Emergency Fund: It is essential to have an emergency fund of at least 6 months (measured in overall monthly expenses) where you will contribute an amount each month and you will only use in case of an emergency. Furthermore, having a budget and tracking your expenses in details for each category is very important in order to create a good emergency fund and know what you really need. If you have your money in a bank account, it would be better to get them out, have cash in hand and take them home. If an economic crisis hits, banks will have liquidity problems, which means that they will impose limits in withdrawals and some may go bankrupt which will lead to not having access to your money.
2. Reduce Expenses: The best you can do before and during an economic crisis is to limit your expenses. Do not buy things you don't need, try not to spend much and eat out, live as simplier as you can for some time and definitely do not buy a car or a house, it's not the time for that. You need as much liquidity as possible, you need to save as much as possible and if you are thinking of buying a car or a house, you should wait until the economy stabilizes, not only for liquidity reasons, but also because house prices and other things tend to have reduced prices as compared to before the crisis.
3. Pay Off Debt: If you have debt, either it comes from bank loans, credit cards or just bills, you should better pay it off as fast as you can (if you can) and not let it rise. During a recession, many people may lose their jobs or even their homes, leading them to a dead end, especially if they haven't built an emergency fund and they don't have a plan.
4. Liquidation of assets: If you have assets like real estate or cars that you want to sell, then better do it the faster you can. This is because you need the liquidity before the crisis hits and during or shortly after that, you will not find buyers very easily and prices will have fallen too.
5. Alternative Income Sources: Having multiple income streams is important, not only during a recession, but generally in your life, especially if you are an employee and you have a stable income. Some alternative income sources might be renting real estate, dividends from stocks or selling your own handmade stuff and finally in the era of internet it's easy to make money either from websites or apps by making different tasks, writing articles or by creating your own website or online business that you will manage in your free time.
6. Investments: During a recession, many small investors panic and worry for their investments thinking if they should sell, hold or buy precious metals for hedging. Here is the thing, you can't time the market and if you are a long-term investor in good companies, then you have not much to worry about. When markets crash, it's the best time for an investor to buy stocks of good companies and generally assets that are worth it. In the long-term, the good assets tend to increase and overcome any difficulties when the recession is over. As for the precious metals such as Gold, even though they tend to increase when the economy is unstable, they do not perform well during an economic crisis which means that you should not bet your money there. With that said, you should continue contributing to your retirement plan, if you have one and you should. The best solution is to have a good diversified portfolio, have a risk management plan and be ready to buy and invest in the assets and companies that are worth it and you like, when the markets crash. You are given a big opportunity.
7. Patience: Don't let fear control you. If you are well prepared, you have nothing to be afraid of and the best you can do is wait for the situation to clear up and the economy to stabilize again. Remain calm, follow your strategy and plan that you should have built and everything will be fine. Every crisis sooner or later passes.
Bonus: Look for new emerging technologies like Blockchain, digital assets and AI both as a solution to some of your problems, either you are a company or an individual, and as an investment. Look into the future and see what technologies will thrive and why. Have you wondered why companies invest more in technology during or after a recession? Companies are vulnerable and new technologies are a solution to many problems, making these companies more transparent, more flexible, and more efficient. The global economy is becoming more and more digital and decentralization and transparency are more important than ever before. This is the start of the digital era.