When the economy takes a turn for the worse and a recession hits, it creates financial challenges for many people. Rising inflation, job losses, and plummeting investment values can put a major strain on your finances. During these uncertain times, it’s important to be proactive about managing your money wisely. Follow these tips to help recession-proof your finances.
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Reduce Spending And Build Your Emergency Fund
The top priority when a recession strike is cutting discretionary spending to only what’s necessary. Eliminate unnecessary subscriptions, dining out, and other expenses. Building up a robust emergency fund needs to be a focus as well. Having 6-12 months of living expenses saved provides a cushion if you lose your job. An emergency fund helps you avoid racking up credit card debt during a downturn.
Pay Down High-Interest Debt
Work aggressively at paying off credit cards, personal loans, and other debts charging high interest during a recession. This debt becomes even costlier when investments are down. If possible, consolidate or transfer balances to lower-rate options. Pay more than the minimum and channel excess income toward reducing high-interest debts.
Manage Essential Spending
Factor in rising prices when budgeting for essentials like food, gas, and utilities. Look for ways to cut costs on necessities through strategies like buying generic brands, saving on gas, shopping sales and conserving energy. Avoid wasting food and other essentials. Stick to needs rather than wants.
Reassess Large Purchases
With uncertainty ahead, it’s wise to think twice before making any major purchases during a recession. Hold off on buying a house, car, appliances, or other big-ticket items if possible. Alternatively, look for good deals or ways to save on necessary large purchases. Delaying major expenses until the economy stabilizes can protect your finances.
Invest Wisely
When investing in a recession, the name of the game is playing defense. Move some investments to safer vehicles like high-yield savings to protect assets and have cash on hand. Avoid panicking and selling at a loss. Stay diversified and be wary of high-risk investments. Dollar-cost average into market indexes. Investing in real estate during a recession can also provide stable returns if you buy at lower prices.
Consider Strategic Job Changes
While changing jobs during a recession is risky, it doesn’t mean you shouldn’t consider strategic moves. Weigh the pros and cons of staying put versus changing roles, negotiating a raise, finding a more stable industry, or learning new skills to expand your options. Update your resume and network just in case. Have a backup plan if your position is eliminated.
Supplement Income If Needed
If you lose your job or your income drops substantially, quickly find ways to supplement, such as freelancing, consulting, delivering, or other side gigs. Explore unemployment benefits and other social assistance programs you qualify for. Any extra income helps offset financial strains.
Communicate With Creditors
If you’re struggling with debt payments or expenses, communicate with creditors before defaulting. Explain your hardship and request for reduced or delayed payments, waived fees, or other accommodations. Most creditors will work with borrowers during widespread financial downturns.
Review Retirement Contributions
Retirement contributions provide valuable tax benefits but consider paring back temporarily to free up cash if needed. Make sure your emergency fund is padded before locking away retirement money. Review how much your employer matches to avoid leaving free money on the table.
Focus On Health
Don’t neglect your physical or mental health when finances feel strained. Healthy habits like exercise, nutritious eating, and stress management become even more important. Prioritize checkups and preventative care. Access free and low-cost resources to support your health and well-being.
Maintain Perspective
Finally, maintain perspective during challenging times. Recessions eventually end and economies rebound. Focus on controlling what you can rather than getting caught up in the news cycle. Share struggles and seek support. With prudence and patience, your finances can weather even the worst downturns. Stay positive and prepared.
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