Tips for Managing Finances During a Recession

A recession is generally defined as a decline in the general economy, usually measured by a fall in GDP for two or more successive quarters. It brings contracting job markets, an increased cost of living, and a general feeling of financial insecurity. Top economists are sounding the recession clarion with a signal that has been historically very acute, according to Business Insider. Your debt and how you handle the cash flow will be very important. Taking care of the debt would reduce the overall financial strain.  If your inflow is affected, being careful with the outflow will ensure you can still meet your needs.

This article is going to give you tips on how to manage your finances from a recession: build an emergency fund, pay down your debt, and cut unnecessary expenses. This just goes to show that a person has an increased sense of stability and peace of mind when they have a solid plan in place during times of economic unpredictability.

Tip 1: Create a budget.

A budget is a detailed plan that outlines your income and expenses over a specific period of time, usually monthly. It acts as a roadmap, helping you consciously allocate your money towards different areas of your life.

A budget becomes even more essential during a recession for several reasons:

1. Visibility: A budget offers clarity on where your money goes, helping you spot areas where you might overspend.
2. Control: It empowers you to take control of your spending and make informed choices to stay within your means.
3. Prioritization: During tough economic times, a budget will be able to help you prioritize those things that are basic, like housing, food, and utilities.

There are various budgeting methods you can employ. The 50/30/20 rule is one of the most common ones. This simple approach divides your after-tax income into three categories:

• 50% for Needs (rent, groceries, utilities, transportation)
• 30% for Wants (dining out, entertainment, subscriptions)
• 20% for Savings (emergency fund, debt repayment, investments)

Tip 2: Cut unnecessary expenses.

These are basically rubbish spends and do not add major value to your life, but rather pretty off-beat against your financial goals. Basically, these are the things that you can do away with or get a cheaper alternative for. According to CNBC, the average American would be able to save $5,339.35 within a year if they resort to cutting discretionary spending.

Examples of unnecessary expenses include:

• Subscriptions: Gym memberships that we never use, streaming services we hardly stream anything from, lost subscriptions for magazines or boxes.
• Dining out and takeout: Frequent restaurant meals and coffee shop runs can add up quickly.
• Impulse purchases: Items you buy on a whim but don't end up using or needing.
• Premium brands: Often, store-brand or generic versions of many products are just as good.
• Unused memberships: Are you paying for club memberships, software tools, or subscriptions you no longer use fully?

The best way to cut the cost is by following the trend of expenses. Look out for your bank statements for at least one month. This indicates where your money goes and gives an idea of the spending trend.

Set realistic limits for categories like dining out or entertainment and stick to the limits. Alternatively, one can even bargain with the service provider (phone, internet, cable) for any recent promotions or work out a discount on existing charges. 

Plan your meals and cook at home. You'll save so much money rather than going out to eat. Who wants to pay a hundred bucks a month for a gym membership, anyway? Just get online and search through Google or check on YouTube for some free ways to work out, or just take it back to old school and get fit by walking or jogging at the park. Unsubscribe from the streaming service collecting dust, or even take a break from the recurring expense.

Tip 3: Focus on high-interest debts.

High-interest debts typically refer to debts with interest rates much higher than the average. Examples include credit card debts, payday loans, and some types of personal loans, among others. The more you pay over time, the more your debt grows much faster than an affordable one.

Especially at this time when there are financial uncertainties, high-interest debts can be quickly out of control. The sooner they are paid down, the sooner your overall monthly expenses will be decreased. For instance, paying off your high-interest credit card debt will mean more money in your pocket each month since you won't have those high-interest fees hanging over your head.

Paying off your debts also improves your credit score, thus enabling you to secure any loans or mortgages at lower interest in the future.

Moreover, settling a debt using the debt avalanche method requires paying off the debt with the highest interest first while making minimum payments on others. After completely clearing out the highest-interest debt, extra money should be applied to attacking the next highest. You might want to transfer balances even to a zero-percent introductory APR credit card for an introductory period on balance transfers if all you want to do is stop interest from piling on for a little while.

Let's say you have the following debts:

Credit Card 1: $3000 balance, 18% APR

Credit Card 2: $1500 balance, 15% APR

Personal Loan: $2000 balance, 10% APR

That is to say, under a debt avalanche method, you will always have Credit Card 1 paid off first because it will accrue the most interest.

Tip 4: Increase income.

A study showed a two-tiered impact of recessions, where disproportionately higher rates of job loss and income reduction were observed against young professionals than older workers.

At the bottom, increasing your income comes down to earning more money. Whether at your regular job, side-hustling, or some altogether new job means that adds an element of security to your life if your working hours get cut, or you lose your job.

The other reason, of course, is that a higher income will let you save more aggressively, which in turn allows you to build up that emergency fund even more quickly and have that aspect of your financial life in better shape for the inevitable ups and downs that come during a recession.

There are a multitude of ways to increase your income. If you are doing well in your job, just take some time to research how much other people get paid in standard industry, and negotiate with your boss for a raise. You might also want to ask about overtime and extra shifts to at least give you some extra cash temporarily. You can also engage as a freelancer. There are different platforms connecting freelancers with their clients for work such as writing, graphic designing, and virtual assistance.

Flexible income options can include side hustles such as being a Rideshare driver, food delivery person, or sales of old household items. If you have a marketable skill or passion, consider how to turn that into a small business that could eventually be scaled.

Tip 5: Be proactive about finances.

In uncertain economic times, taking an active role in managing your money is crucial. This involves building a support system, staying informed about your finances, and taking preemptive steps rather than reacting after the fact.

Find your "money fam." It can be:

• A financial coach or advisor that will offer personalized advice and help you create a long-term plan.
• Supportive friends and family to discuss financial goals.
• Online communities with like-minded individuals for motivation and tips. 

To craft a system to stay ahead of the curve, you can set aside time each week or month to review your budget, track spending, and assess your financial progress. Stay updated on economic trends without being consumed by negativity. Focus on reliable sources rather than fear-mongering headlines.

You can also set up automatic bill payments or savings transfers to take some of the mental load off your shoulders. Remember, financial planning is an ongoing process. By being proactive and seeking support, you can position yourself for greater financial stability, even during challenging economic times.

The Bottom Line

Recessions, while unpredictable, are a normal part of the economic cycle. Taking proactive steps now can significantly reduce stress and strengthen your financial position should a downturn occur. Understanding your income and expenses offers control and helps identify areas for potential savings.

A study on BUMDes underscores the long-term benefits of proactive financial planning. The study found that individuals who took action to improve their finances before a recession were not only better able to navigate the economic downturn but also experienced faster financial recovery afterward.

While no one can fully recession-proof their finances, taking action with these tips puts you in a much stronger position to weather any economic storm. Remember, being financially prepared is an ongoing journey of making smart choices and adapting to changing circumstances, bringing not only financial security but peace of mind.