Unfortunately, a recession is something beyond our control, but we can manage how we respond and prepare for a financial downturn. Even though the current economic outlook is uncertain, it’s never too late to ensure that your finances are well-equipped to weather any storm. Here are several tips to help recession proof your finances:
1) Identify Ways to Cut Back
Downsizing and learning how to live frugally is a great strategy. If you can learn to live with less, you’ll increase your savings and you won’t find yourself struggling to adapt to a new lifestyle during a recession. It’s always a good idea to examine your monthly expenses and identify which items are discretionary and which items are necessary. Specifically, take a look at all your subscription-based expenses – especially ones for services you are not currently using. Do you still need a gym membership? Can you exercise in other ways for free? What about cable and music services? Why pay for content when you don’t need to? Another item to review is your auto insurance plan. How much have you been driving during the pandemic? Are you working from home full time now? It might be beneficial to call your insurance agent to see what discounts are available for low mileage drivers or what unnecessary coverages can be dropped.
2) Live Within Your Means
Experts typically recommend spending no more than 30% of your net income (earnings after taxes) on nonmandatory items. It’s a good idea to create a monthly budget to ensure that you’re living within your means and not overspending. It’s real easy to say, “don’t spend more than you make,” but it’s much more difficult to achieve — especially if you are not budgeting. Additionally, don’t get sucked into the comparison trap. It’s natural to observe how everyone around us is living their lives — and thanks to Facebook and Instagram, it’s caused us to become more hypersensitive to how everyone else is spending their money. Social media sites have made falling into the comparison trap all too easy. Be smart and practical with your money while avoiding outside influences.
3) Pay Down Debt
It’s crucial that you pay down any outstanding debt — more specifically, high-cost debt, such as your credit card balance — to create some breathing room in your budget. Prioritize credit card debt, then turn to other types of loans, such as mortgages or auto loans. This is even more imperative with credit cards considering their record-high interest rates averaging in the 20% to 30% range.
4) Boost Emergency Savings
Even if you’re paying down debt, it’s important that you prioritize saving. Focus first on loading up your emergency fund with one month’s worth of living expenses. Then try to save about 3 to 6 months’ worth so you won’t have to turn to credit. Using credit as a safety net is a mistake that often haunts people for years after the fact. Remember, an emergency fund is simply insurance against debt. If your saving account balance is $0, I would suggest saving a few thousand dollars first before you begin tackling your debt.
5) Diversify Your Investments
First, as a disclaimer, I am not a certified financial coach or advisor, so I usually avoid this topic for obvious reasons. However, it should be common sense to know that if you have most of your money tied up in stock market investments, an economic downturn could be a financial disaster. It’s for this reason that diversifying your investments is paramount. Go through your investment portfolio and make sure your investments are spread out across different industries and even different types of assets.
6) Continue Your Education and Develop New Skills
Another consideration to recession-proof your life, and one of the best investments you can make, is pursuing further education. Continuing to develop relevant, work-based skills to make yourself more valuable to your employer or a potential employer could lead to a higher salary. This could be attending a conference, workshop, or seminar in the field of your passion. Many universities offer continuing or professional education courses either in classroom or online. The University of Georgia recently offered about a dozen free online courses. I signed up for the Creating WordPress Websites course since I’m still learning how my website works. There’s so much free content out there that can prove beneficial to sharpening your respective skills. My alma mater, Kennesaw State, has a tremendous College of Professional Education that offers a wide array of certificate-based programs designed to help you advance in your career.
“An investment in knowledge pays the best interest.”
Benjamin Franklin
Final Thoughts
As I’ve been saying to anyone who will listen – “This pandemic is the greatest wake-up call of our lifetime to get our finances in order.” Now is the time to take a hard look at how you are managing your money and determine what changes can be made in your spending, saving, and giving habits. Before any purchase ask yourself, “Is this a need or a want?” If you don’t have a budget, there’s no better time to start one. Determine what expenses can be cut. For example, cutting cable was excruciating for me. Now I don’t miss it one bit. In fact, I love to point out to my wife how much we’re saving from that one decision! You might surprise yourself with how much you can live without.
Jason is the author of Margin Matters: How to Live on a Simple Budget & Crush Debt Forever.