A recession occurs when the value of goods and services produced falls for two quarters in a row. Whereas in ordinary times, the economy of a country tends to grow, during a recession, the economy shrinks, meaning there are less jobs to go around as companies become less profitable and cannot afford to pay their employees and shareholders.
With debt levels rising, oil prices dropping, and the markets fluctuating, knowing some money saving tips can help you to survive a recession. Consequently, while the reasons for a recession are generally beyond our control, preparing for and responding to a recession can make a huge difference to your finances.
So, let us discover 4 important money rules that can help you to survive a recession.
- Preparation is Key
During a recession it is no secret that your job and your income are at risk. Consequently, if the economy starts to take a turn for the worse, you need to know you can still afford to get through day to day life during times of financial hardship.
Saving money during a recession is exceptionally tough as it is highly likely you will have other financial concerns to worry about. Consequently, always try to start saving before a financial downturn hits the hardest.
One way to prepare for a recession is by saving an emergency fund. If your working hours get reduced, if you lose your job, if your business is no longer profitable, or if you have made poor financial decisions, an emergency savings fund provides a safety net.
Most people find that saving 3 to 6 months of their monthly wages is enough to bridge the gap when the economy is on a downward spiral. Money can be tight and turning to credit should only ever be a last resort, but your savings can offer a light during a time of financial darkness.
There is no telling how long a recession might last, and debts accumulated in these times can be difficult to shake off. We often become accustomed to living off our entire paycheck, and, therefore, without emergency savings, you might run into difficulties.
- Budgeting Is Everything
It might seem intuitive, but establishing a budget is vital. Start by taking stock of your finances and all of your payment obligations and create a plan to pay off any debts.
Try to create a budget that reflects the money coming in and going out of your household. What are your utility costs, and when must these payments be made? If you have any outstanding debts, these should also be factored into your budget.
Surviving a recession is all about living within your means and managing your money in smarter ways. Correspondingly, if you do have any debts, aim to identify areas where you can cut back on spending.
During recessions, carrying debt is risky. While payments might seem easy to cover before a financial crisis, any changes in your earnings could impact your ability to pay off your debts and so budgeting is your best possible defence for managing your money appropriately.
- Downsize Your Lifestyle
When times are hard, knowing how to live more frugally has huge benefits. Learning to live with less not only boosts your savings, but also ensures that adapting to a more cost-effective way of life will not be as much of a shock when a recession does hit.
Living a frugal life does not have to mean cutting out all of your luxuries. Instead, try to make conscious spending choices that can reduce your expenses while having minimal impact on your lifestyle.
For example, if you currently own multiple vehicles, you might want to consider selling one or switching to a more fuel-efficient model to save on fuel costs.
If the costs of running your home are escalating, you might also want to think about downsizing to somewhere more affordable.
Furthermore, when shopping for groceries, own-brand products can help you to save money. You can even scale back on your mobile phone plan if you are paying for data or services you do not need.
Essentially, downsizing should not involve making extreme cuts as this can be difficult to sustain. Instead, spend some time researching simple changes to recession proof your life.
- Diversify Your Income and Investments
Relying on one job for the entirety of your income is inherently risky. If you lose your job, or if your hours are cut, you will lose your ability to meet your financial obligations.
However, multiple income streams can help you stay afloat. Freelancing jobs can prove fruitful if flexible hours are important to you. Additionally, you could rent out a room in your home, lease space in your garage, or invest in a rental property.
In terms of investments, regularly review your portfolio and ensure your money is spread out across different industries and asset types. This way, if the markets tumble, your investments will be protected.
Real estate investing, stocks and shares, bonds, and international investments can all reduce your vulnerability during recessions so be sure to diversify for total peace of mind.
Ultimately, while a recession is out of our control, preparing for tough financial periods now can safeguard your finances for the future. Above all, getting your finances in order ensures that you are ready for whatever might be around the corner.