7 Tips for Managing Your Finances during a Recession
When hard times hit, it's natural to be worried. An economic recession can mean higher unemployment and less confidence in keeping or improving your current salary. However, for those that have prepared, a recession doesn't have to spell disaster. That's why we've gathered together some simple strategies to help get you through any downturn. Keep reading to learn more about what a recession means for your pocketbook and simple ways to safeguard your financial well-being.
What Is a Recession?
To put it simply, a recession is time period in which a region or state experiences sustained decreased economic activity that lasts for more than a few months. Typically during a recession, you can expect to see increased unemployment, decreased consumer spending, and reduced economic activity like manufacturing or production of goods. A recession can last for months or sometimes even years.
Why Do Recessions Occur?
Recession is not a new idea. They’ve happened on and off throughout the advent of the modern-day economy as we know it. Since World War 2, the U.S. economy has technically weathered 12 different recessions, including the 70’s Oil Embargo, the Dot Com Crash of the early 2000’s, and, more recently, the Great Recession spawned out of the 2007-08 housing crisis. Recessions happen with some regularity, but the causes and timing can be extremely difficult to predict.
Did COVID-19 Cause a Recession?
Part of what makes recessions hard to predict is that they can be brought on by a number of different factors. One great example of this unpredictability is the current economic downturn caused by the Coronavirus pandemic. By many economic indicators, the year 2020 began with a booming U.S. economy. Unemployment was stable and the stock market was breaking records. Unfortunately, the nation was not prepared for what was on the horizon.
At the time of publishing this article, the country has entered into a period of record unemployment, a volatile stock market, and an unprecedented drop in consumer spending. Because a recession, by definition, happens over several months, it is challenging to identify them with certainty early on. However, economists range in their predictions for how extensive the current setback is going to be, so saying that a recession was created by COVID-19 is certainly not out of the question. But what does that mean for you?
Why It’s Important to Prepare for a Recession
Regardless of what may cause a rainy day, we know that they can happen at any time. Making sure you’re prepared is always a smart idea. By taking the appropriate steps now and having a plan in place when hard times hit, you will be able to rest easy knowing that you have done your due diligence. This sort of preparation requires discipline and budgeting, but these are key for anyone looking to reach specific financial goals – no matter the state of the economy.
How to Recession-Proof Your Finances
If the current financial pinch has you feeling uncertain about your financial future, this is a great time to start working towards recession-proofing your finances. Here are seven tips from financial experts to help you ensure that your financial future can withstand the temporary ups and downs that the national economy is sure to encounter.
1. Increase Your Savings
While your ability to earn money in a recession may sometimes be hindered, many of your fixed expenses will likely remain the same. Rent, utilities, groceries, and debt payments will still need to be made. Your best bet is to have savings in place to keep you and your family protected and your monthly bills paid. If you are just getting started, we recommend beginning by setting up a $1,000 emergency fund. This is only to be used if you need to tackle unexpected expenses, like vehicle repair or replacing a failing home appliance. This is not your vacation fund!
Pro-Tip: You can make your money work for you by finding a savings account that offers a high dividend but still allows you to access your money when you need it. We recommend our money market savings account, which will allow you to make unlimited deposits and withdrawals without penalty.
Once you’ve created your $1,000 emergency fund, set a higher goal for yourself. Continue focusing on increasing your savings until you have enough to cover all your normal expenses for 3 – 6 months. It might be wise to create a separate savings account for these funds, but it still needs to be an account that allows you to withdrawal funds easily in case you are ever in a position where you are experiencing a few months without a paycheck.
2. Reduce Your Expenses
One of the ways to help increase your ability to save it to cut down on your monthly expenses. If you are struggling to identify areas where you might be able to pull back on spending, here are a few common sense tips for minimizing everyday expenses:
- Always compare prices from multiple retailers
- Use coupons when shopping
- Consider trading in your cable service for a streaming provider
- Cancel the gym membership and work out at home
- Request quotes for lower home and auto insurance policies
- Buy used, refurbished, or generic products where possible
- Replace sodas, juices, and other drinks with water
- Cook at home instead of ordering takeout
If these smaller lifestyle changes aren’t enough to help you reach your goals, there are additional steps to consider. Check into refinancing your auto loan to see if you can get a better rate and lower your monthly payment. You may also be able to refinance your mortgage if you own your home. These steps will enable you to hang on to more of your hard earned money, meaning you will have a greater capacity for what you can put into savings.
3. Consolidate Debt and Pay it Down
Some people fail to realize it, but getting out of debt is one of the most effective ways to reduce monthly spending. If you are unable to pay off a credit card, student loan, or other debt off entirely, then there are still ways to help reduce your monthly payments. For example, you might be able to transfer debt from a higher interest credit card to a card with a lower interest rate.
Pro-Tip:Always check for balance transfer fees and other hidden costs before moving debt from one credit card to the other. At First Service, our low rate credit cards incur no annual fee and there is no balance transfer fee.
If you have more to worry about than just credit card debt, you might consider taking out a personal loan to consolidate your debts. This can drastically reduce the amount you pay each month, which will help increase your ability to save.
4. Rework Your Personal Budget
After figuring up how much you need to save and cutting back on unnecessary expenses, it should be fairly easy to create a new budget. Start by tracking your new expenses and expected income over a couple of months. Figure up what you’re able to set into savings and determine how much you should be putting aside each month. Of course, if you share financial responsibilities with someone else, be sure to involve them in the process. If this is a family budget, set aside time to discuss your plan to make sure that everyone understands the goals and is prepared to work together towards them.
5. Don’t Panic over Long-Term Investments
When a recession occurs, it’s important not to panic. Most financial experts agree that selling during a market downturn is not the best idea. An upturn follows most market downturns, and when you are investing over several decades, those ups and downs are usually already part of the long-term investment strategy – especially if you’re working with an experienced wealth management team.
Similarly, it’s never a good idea to make financial decisions based on emotion. While an economic recession or personal financial hardship can be scary, it’s important to remember that they are temporary. Always take time to cool off and think through major investment decisions because failure to do so could cost you money in the long run.
6. Supplement Your Income
Recessions are hard to predict and their causes can be even harder to identify. However, one positive thing that can come from a recession is that they sometimes provide an opportunity to try something new. Starting a side hustle during an economic downturn can help put some extra cash in your pocket in the short term, but it could also help with developing new marketable skills that boost your earning potential over time.
7. Stay Positive
Recessions can be frustrating, discouraging, and can throw you off track when it comes to reaching your financial goals. The good news, though, is that they don’t last forever! Remember that recessions are only temporary setbacks. Stay positive and continue working towards your goals. Before you even realize it, the economy is bound to pick back up.
Don’t Face a Recession Alone
Here at First Service, we’ve proudly served the great people of Houston for over 40 years. Part of the credit union’s strength is that we’ve seen our community go through its share of ups and downs, and we know how to respond to troubled times. If you need help getting through financial hardship or you want to learn more about preparing for a rainy day, we want to be a partner that helps you prepare for a brighter financial future. What can First Service do for you?
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