Kavan Choksi Talks About How to Prepare for a Recession

A recession takes place when the economy of a region declines over a span of several months or years. During such periods, the gross domestic product (GDP) of the region, or the total value of the goods and services it produces drops. As Kavan Choksi says, at the same time, dramatic changes might be seen in the price of commodities like gas or oil. Industries that were previously profitable also face the risk of suddenly becoming less valuable. During a recession, consumers may even experience higher-than-normal levels of unemployment and hence they might be less willing to spend money than usual.

Kavan Choksi offers a brief insight into how to prepare for a recession

Companies make fewer sales during periods of recessions, and economic growth stalls or becomes almost non-existent. Companies might be forced to lay off large portions of their staff to cut rising expenses, which ultimately leads to widespread unemployment. Hiring also slows down at the same time, making it extremely difficult for newly unemployed individuals to find another job. Investments such as stocks and real estate often lose value during recessions, which can negatively impact retirement and other savings accounts. Moreover, lenders may react to the heightened financial uncertainty by tightening their lending requirements, making it significantly harder for individuals to qualify for new credit accounts.

Recessions are unfortunately an unavoidable part of any economy. It however is possible for people to weather the storm by anticipating challenges early and preparing for the future. One of the hardest aspects of a recession is not knowing what may come next and when things might get better. Hence, it is prudent for people to be clear about where they stand financially. They should ask themselves the following questions to take stock of their financial situation:

• How much cash do they have on hand?
• How much cash they can acquire fast, if necessary?
• How much debt, like student loans and credit cards do they have?
• What are their basic monthly living expenses, which would include food, accommodation, health insurance, transportation and childcare?
• Do they have any upcoming life events that can result in significant expenses, like a wedding or a baby?

Based on the answers to the questions listed above, one has to identify what they are spending today and anticipate their needs over the next six months or so. To be prepared for a recession, a job loss or other financial hurdle one must typically have an emergency fund that covers three to six months of living expenses.

As Kavan Choksi says, if one does not have enough funds to cover 6 months of living expenses, they should make adjustments to their budget and start saving as soon as possible. The simplest way to save money would be to cut down on non-essential spending, like clothing and entertainment.  While it is not realistic to cut out all discretionary spending, one must learn to separate wants and needs.

 Interest rates have been rising over the last few years as the Federal Reserve is tightening monetary policy to control high inflation. This increase can be problematic for borrowers, especially those with revolving debts like credit cards. Paying off pending debt is important for preparing for a recession. In case one has multiple debt balances, they can consider a debt consolidation strategy. This would involve taking out a single, fixed-rate loan to pay off various higher-interest balances. Such an approach can help streamline the payments and potentially reduce interest costs.