Currently, the majority of economists predict that there will be a recession that will affect people’s jobs and income. As a result, many individuals are altering their spending and saving habits to prepare for the impending economic downturn. It is important to safeguard your finances during a recession, not just as a strategic decision, but as a necessity. The better prepared you are, the more likely you are to make it through tough times. If you’re unsure where to begin, we have compiled all the information you need to know about safeguarding your finances during a recession.
1. Have a Debt Strategy in Place
Managing multiple forms of debt can feel overwhelming, especially when faced with a recession. However, there are a few methods to start paying off debts. One approach is the debt snowball method, where you focus on paying off smaller debts first, building momentum and feeling encouraged as you eliminate each one.
Alternatively, the debt avalanche method involves prioritizing the highest interest-rate debts, helping you stay ahead of rising interest rates. If you struggle with making payments on time, debt consolidation through a personal loan or balance-transfer credit card may be helpful, though interest rates may be higher. Overall, there are several options available to help you get out of debt and manage your finances during a recession.
2. Set up Separate Accounts for Financial Savings Goals
If you’re starting to put money into savings, it may be beneficial to open multiple accounts based on your goals and when you expect to use the funds. By setting up separate accounts, you can keep track of where your funds are allocated and prioritize your financial goals without accidentally using funds meant for a new car to pay for a vacation.
Several types of bank accounts can be useful for short-term savings, and the account you choose may depend on when you plan to use the funds and the level of return you desire. For instance, a high-yield savings account may be an option if you’re looking for a competitive interest rate, while a money market account may provide a higher return with some flexibility in accessing your money.
A certificate of deposit account is another alternative, offering a fixed interest rate over a set period of time. By choosing the right account(s) for your goals and financial situation, you can make the most of your savings and be better prepared for any financial challenges that come your way.
3. Build an Emergency Fund
In the face of unexpected events like layoffs, an emergency fund is essential to ensure you have the financial resources to survive difficult times. In addition to protecting against inflation, having savings to fall back on during a recession is critical. It’s important to work towards building an emergency fund that covers at least six months of expenses, and even starting with small amounts can make a difference.
When creating an emergency fund, it’s also important to consider different ways to build it beyond just relying on cash savings. For example, investing a portion of your savings into liquid instruments can provide easy access to cash when needed. If you’re unsure about your investment options or need guidance on which instruments best suit your goals and risk profile, consider reaching out to financial experts for assistance. Building an emergency fund may take time and discipline, but it can provide peace of mind and financial security during challenging times.
4. Set Short-term Savings Goals
When you’re starting to save for short-term goals, it’s important to begin with small, achievable targets that you can reach within six months to five years. Choose goals that are specific, realistic, and measurable so that you can track your progress and celebrate your accomplishments along the way.
One approach is to set aside a little money each month towards your goal, which can help make it more manageable and less stressful in case of emergencies. Some specific goals to consider might include saving for a rainy day with three to six months of emergency savings, setting aside funds for a wedding, saving for a large vacation, or putting together a deposit for a new apartment.
Remember that these goals may differ for everyone, depending on their unique circumstances and financial situation. The key is to start with small and achievable targets and build on your progress over time. By saving regularly and sticking to your plan, you can work towards achieving your short-term goals and improving your financial stability.
5. Set Long-term Savings Goals
When it comes to long-term savings, it’s important to visualize your future spending and set goals accordingly. These goals should be specific and aimed towards targets that won’t be met for at least five years, but which are important enough to start saving for now. It’s also important to keep in mind that life circumstances can change, and you may need to adjust your savings plans accordingly.
Some long-term savings goals to consider include saving for retirement, your child’s education, paying off student loans or paying off a mortgage. These are all significant expenses that can take years to pay off, so starting early and saving consistently can help you stay on track and achieve your goals.
6. Have Additional Income
In uncertain economic times, having a side hustle can provide an extra cushion of financial security. Even if you have a stable full-time job, having additional sources of income can be helpful in case of unexpected job loss or reduced hours. Diversifying your income streams is just as important as diversifying your investments.
It’s a good idea to explore options for diversifying your income, such as consulting work, freelance projects, or starting a small business. By having multiple streams of income, you’ll be better prepared to weather a recession or other financial challenges. Plus, you may even discover a new passion or profitable venture that could grow into a full-time business in the future.
Guest Post by Naina Rajgopalan, the content strategist at Freo Save
Image from Unsplash : https://unsplash.com/@falcos
Smrutirekha Bhoi