Tips For Managing Your Finances During A RecessionOctober 26 2020
"It is now more important than ever to carefully track your finances. Get the right personal finance habits in place now and follow through with them even when times get better." - Ben Crow
But as the saying goes, when the going gets tough, the tough gets going. While an economic downturn is something that is beyond our control as individuals, we can control how we respond to economic instability and ensure that we will not only survive, but come out of it stronger.
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Instead of panicking and worrying during a financial crisis, you should focus on protecting the financial security you still have. Here are our general tips on how you can get through (and even thrive) through financial crises, recessions and pandemic outbreaks.
1. Boost your savings
During a recession, your ability to earn money may be affected. When the economy starts to dip, our jobs and our income can be put in jeopardy. This means that there’s a chance you may be laid off or your business may experience a decline in income, which can even result in bankruptcy. While your income may decline or may be totally cut off, many of your expenses will likely remain the same. You still need to pay your rent, utilities, groceries and debt, among other things. With this, preparation is your key to success. Your best bet to survive an economic downturn is to have savings in place so that your monthly bills will still be paid and your debt repayments will not stall. Set up an emergency fund so you can be ready for the worst-case scenario. Remember that this is not your vacation fund!
2. Lower your spending and live well within your means
Learn to make do with less. Cutting down on your monthly expenses and learning to live frugally is one of the best ways to get through an economic slowdown. It will also help boost your savings. If you’re unsure what areas where you might be able to reduce your spending, start by cutting down small lifestyle expenses. It is absolutely critical that you are making your necessities and fixed costs your number one priority.
But living within your means isn’t as difficult as it sounds. A frugal lifestyle doesn’t have to be about depriving yourself of things that bring you joy. You can start by making conscious spending choices that will reduce discretionary expenses but have very minimal effect on your lifestyle. These small changes will eventually have a significant impact on how you fare during a recession.
3. Control or minimise your debt
During economic recessions, it’s not surprising that debts can get out of hand. Carrying high levels of debt can be very risky, because any unexpected changes to your financial status could end up affecting your ability to pay these debts.
It’s important to stay on top of your debt payments to ensure that they are not negatively compounding to the point that you need to take on even more of a financial burden (e.g. taking on another loan to pay off an existing one).
4. Rework your budget
After calculating how much you need to save and reducing unnecessary expenses, it’s back to the drawing board (or rather, the budgeting board). Start by listing down your new expenses and expected income over a couple of months. If you are sharing financial responsibilities with someone else, involve them in the process and make sure you are on the same page. If you are living with your family, take time to discuss your plan to make sure that everyone understands the goals and everyone is committed to work together to attain them.
5. Don’t panic over long-term investments
The prospect of a recession can be rather daunting, if not frightening. But it’s never a good idea to make financial decisions based on emotion. You may be tempted to sell your investments out of panic, but financial experts say this might not be the best idea. Remember that an upturn usually follows most market downturns. If you have a long-term investment strategy, the cycles of the market are usually accounted for. While an economic recession or personal financial hardship can be scary, the good news is that they’re temporary. Always take time to cool off and carefully consider major investment decisions because failure to do so could cost you money in the long run.
6. Find a new source of income
Recessions are unpredictable and their causes can be difficult to pinpoint. But one potentially positive outcome from a recession is that they can open opportunities for you to try something new. Starting a new side hustle can not only provide you with a new income stream in the short term, but it could also help you develop a new skill that could boost your earning potential over time.
7. Stay positive
Recessions can have detrimental and snowballing effects on your personal finances. It can throw you off track when it comes to reaching your financial goals. So, it’s understandable that when hard times hit, you feel frustrated and discouraged. But as we’ve mentioned, recessions don’t last forever. Keep a positive mindset and remember that recessions are only temporary setbacks. Be prudent with what you do have while you ride out the wave. And continue working towards your goals by creating a strategy that will work for your current circumstance.
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Torrazo, Z. M. (2020, October 1).Tips for managing your finances during a recession. Financial Resources - Earn, Borrow, Save, Invest and Retire | nestegg.https://www.nestegg.com.au/save-money/expenses/tips-for-managing-your-finances-during-a-recession