It could be a golden opportunity.
Based on what the experts are saying, there's a strong likelihood that we're heading toward a recession. According to a recent Bloomberg News survey, about 4 out of 5 economists expect a recession in 2023 or 2024.
Although recessions are stressful, they're also an opportunity to build wealth. You may have heard that rich people make even more money off these economic downturns. But it isn't just the 1% who can come out ahead. If you're in a good financial position and you play your cards right, it's possible to do very well for yourself.
1. Invest as much as you can
The easiest way to get rich during a recession is to invest as much money into the stock market as you can. When there's a recession, stock market performance declines. Consumers spend less and companies earn less, causing investors to worry. Some investors sell off part of their portfolio out of fear or because they need the money.
For those who have money to invest, this is an amazing opportunity. Stock prices could drop by 20% to 30%, or possibly even more. Even though it may seem risky, the market has always bounced back after recessions. If you invest more when prices are low, you can effectively buy at a discount and earn big returns when the market recovers.
If you're new to investing, you may be wondering how exactly you should invest your money. You have a few options here. The first is to invest through tax-advantaged retirement accounts. You save on taxes with these, with the catch being that you need to wait until you're age 59 1/2 to withdraw money penalty-free. Here are the most popular retirement account options:
- 401(k)s
- Traditional IRAs
- Roth IRAs
Another option is opening an individual brokerage account with any of the top stock brokers. There won't be any early withdrawal penalties, but this doesn't come with the tax savings of retirement accounts.
As far as what to invest in, most people go with investment funds to keep it simple. Index funds that track the S&P 500 are a popular choice, as they get you exposure to the 500 largest publicly traded companies on U.S. stock exchanges.
2. Protect your income
Stable income is a key part of personal finance success, including building wealth. If you lose your job, you're probably not going to be able to invest much money in the stock market. To make matters worse, if your savings runs out, then you may need to sell low on your stocks to pay your bills.
This is why it's so important to protect your income, which means ensuring you always have a way to make money. Here are a few ideas on how to do this:
- Focus on being a top performer at work. Assuming you're happy with your current job, the best-case scenario is you hang on to that. The more valuable you are to your employer, the more likely it is that they keep you on even if they need to cut staff.
- Build new income streams. You could start a side hustle or a freelance business, even if it's only something you do for a few hours per week. If your employer needs to reduce your hours or lay you off, you'll at least have backup sources of income to fall back on.
- Make yourself more marketable. Consider learning new skills and polishing up your resume. If you need to look for a new job, this could help you find one more quickly.
3. Cut back on expenses
People often spend less during a recession because of financial insecurity. If you completed the step above and you're confident in your ability to make money, this may not be a huge concern. However, it's still a good idea to see if you can trim your spending, for a couple of reasons.
Most important is that if you're spending less, you'll have more money available to put into the stock market. And trust me, no one ever says "I wish I hadn't invested so much back when stock prices were really low."
By reducing your expenses, you also give yourself more breathing room if your income decreases. Perhaps your employer needs to cut your hours by 30% over the summer. That's going to be easier to manage if you normally only spend 50% of your income, anyway.
You don't need to deprive yourself of everything and take your spending as low as possible. But it's worth looking for ways to cut back on expenses without affecting your quality of life. For example, you could:
- Shop around for lower rates on auto and homeowners insurance
- Get rid of subscription services you don't use often
- Download coupon apps to save on groceries and household essentials
As you can see, getting rich during a recession isn't that complicated. Keep your expenses low, make sure you have steady income, and invest as much as possible. If you're able to do that, you'll come out ahead.
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