Recession-Proof Your Finances
There’s always the risk of an economic downturn due to unforeseen circumstances. In the last 15 years alone, we’ve experienced both the Great Recession in 2008 and the effects of COVID-19. However, as the economy recovers, it could mean that we see an acceleration thanks to efforts to return the world to normal.
Of course, even in times of stability and profit, you should always have a way to secure what you have. Perhaps times of economic prosperity are actually the best times to protect your finances from a potential recession since you will likely have more resources to save, invest, and find new sources of income.
There are many ways to protect your finances from experiencing the downturns that inevitably hit markets and businesses. Here are some of the best ways you can do that:
Begin Paying Off Credit Card Debt
Credit card debt accounts for most personal loan issues that people encounter. It’s so easy to pay for something in advance, expecting you’ll eventually get the money to pay for it. However, you are using someone else’s money and have to pay more than what you borrowed if you don’t make payments on time. If you fail to do that, it could spiral into deep debt.
Like most loans, interest accrues with credit cards. If you don’t begin paying off the principal, the amount you pay only climbs up with each missed payment. You can protect yourself from problems during a recession by paying off this debt. Use credit cards to your advantage, but make sure you don’t overspend.
One way you can reduce credit card debt is to overpay during collection. Pay a little more than usual so that it hits the principal. Even small amounts will allow you to pay off your debt over time.
Track Your Budget
Small purchases can add up. Most people who don’t track their spending are in for a surprise when they take note of their expenditures. Even your morning coffee routine can cost hundreds of dollars down the road. For example, if you bought a $2 coffee every day for a year, that adds up to $730 minus tax.
You don’t have to sacrifice most of your conveniences, but by tracking them, you can see areas where you might be overspending.
From there, it’s a simple task of rebalancing and setting limits. You have to learn to live within your means or at a lower one when a recession hits. Here are some things that may be eating your income:
As mentioned earlier, you don’t have to cut spending off from this to prepare for a recession. You only have to make sure that you aren’t going over the limit of what you find comfortable, especially if you want to start recession-proofing your finances.
Build an Emergency Fund
An emergency fund is a pool of money that’s easily accessible when you need it. Since a recession can last for long periods, having a lot of cash is crucial. Having at least a year’s worth of your monthly income can keep you comfortable as you start getting your financial house in order.
While it should be accessible, you should create a barrier to entry so you can avoid impulse withdrawals. Store money in a separate account, and use over-the-counter withdrawals only.
Having money sitting down doing nothing is not an ideal move. You can place it in a high-interest insured account. That way, the money grows over time, and you also have some form of protection. With it, you’ll be less dependent on loans so you won’t have to take on debt during a recession.
Seek Extra Income Sources
It can be challenging to seek out other means of income when you have a full-time job, but now is the time to do it. While you still have the means to live comfortably, you’ll need to seek out money sources on the side to accelerate your preparation.
It doesn’t have to be a job with fixed hours of commitment. Today, there are many ways to begin earning money without too many resources. Some examples include:
Building a passive income stream
By having multiple income streams, you’ll still have sources of cash when you lose your job. You may not have as much money before, but at least you’ll still have a little that can help when needed.
Build Your Investment Portfolio
Investments are there to make your money work on your behalf. You have different ways to invest, from placing money in stocks or even more volatile markets like crypto. Often, these markets take a hit during the recession, but they can steadily grow over time despite it. As long as you have a view for the long term, market dips and crashes won’t bother you as much.
A common question people ask is, “When do I cash out on my investments?” The best answer for that would be when you need to cash it out for something. Many people make the mistake of withdrawing their money for the sake of profit alone. They do that only to regret it when the asset continues to grow in value.
There is no regret with the money you take if you have a purpose. That need is the reason you have an investment in the first place.
Another scenario you’ll consider cashing out is when you’re ready to retire. By then, your investment would’ve grown to a hefty amount to care for you in your later years.
Improve Your Credit Score
One of the things you should be building up is your credit score, especially when you have the means to do so. A higher credit score will provide you with more flexibility. You can get better loan options, interest rates, and payment plans with it since the credit score shows how risky you are as a borrower.
You can get into loans that won’t affect your income as much. Even if you’re paying off a mortgage or any other loans during the recession, you’ll be fine. Your investment in your credit score will pay off as the loans won’t have as big of an impact compared to others.
Invest in Yourself
It’s a trend to see several industries suffer greatly when a recession hits. During the housing market crash, real estate businesses began shutting down. When the coronavirus hit, retail and travel companies suffered the most from the lockdowns. You can’t be a one-trick pony if you want to stay ahead in the job market.
By investing in skills, and education, you can prepare yourself to transition when the worst-case scenario happens. Some industries flourish and build during recession towards the next economic boom. Those will become areas of opportunity if you want to make the most out of a bad situation.
Investing in your knowledge about personal finance can also help you avoid pitfalls that will lose you money. Learning about savings, investments, debt management, and the like will add up. Eventually, you’ll begin to make better decisions with your money.
Diversify Your Portfolio
Another mistake people make is putting all their eggs in one basket, so to speak. Even if sectors like technology are performing well, it doesn’t mean they won’t get affected in the future. The best way to protect your investments is to have different baskets that grow separately. That way, when one is down, another is up.
Diversification reduces risk by ensuring that your money isn’t going in one direction. Not only that, most of the time booms mean increases in all markets. You protect yourself from the downturn and take advantage of upward movements.
Think Twice Before Taking on Debt
Big-ticket items often mean new loans and more debt. Maintaining a good debt-to-income ratio is always something you need to consider. For example, if you are buying a new house, consider that you might be paying a mortgage for the next couple of decades. In that time, a recession could occur, especially with how frequent they’ve become in the past century.
Ask yourself, will you still be able to pay the debt when you lose a source of income? If yes, then the debt is still manageable. If not, you may want to weigh the risks before moving forward with your decision.
No One Can Predict the Next Recession
A recession hits hard and without warning. In 2020, no one expected that COVID would impact the world the way it did. Even with our increasingly globalized world and quick access to information, you won’t often see the effects of an event until it hits.
Development is also at a fast pace compared to before. It spurs rapid change, which means you never know what to expect. The best way to deal with the situation is to manage what you can control. You can control how much money you have and save. Preparation is the key to surviving any downturn.
About the Author
Rick’s been with Money Fit by DRS for 18 years and early in his career, he managed two divisions, customer service, and credit counseling, before settling in his current role of managing the organization’s marketing efforts. He is known for being someone who’d give the shirt off of his back for you, and smile while doing it! He takes that positivity and problem solving to consumers when relaying a message of help, hope, and better times ahead. When he isn’t helping consumers regain control of their debt, he loves traveling and seeing new places.