The Covid-19 pandemic has thrown the whole world into a recession. Several organizations have downsized, reduced working hours, and others have gone bankrupt. Commodity prices are down and the tourism industry has almost been wiped out. Businesses are struggling and the world’s economy has been brought to its knees, leaving several people and families in despair on how to survive a recession.
A recession is something we don’t have any control over but our preparation and response is what we can control. Saving some money or protecting your finances could make a lot of difference when the next recession hits. Find below tips on how to recession proof your finances.
Have an Emergency Fund
A recession leads to loss of jobs or income, hitting our finances and this makes having an emergency fund crucial. An emergency fund is money that you have saved up to see you through difficult financial moments.
An emergency fund can provide a financial buffer to get you through your day to day living, if your working hours have been reduced, you’ve been laid off, or your business isn’t bringing in cash. It will provide a safety net, help you ride the wave and bounce back on your feet after the recession.
Its advisable to have an emergency fund that is at least 3 to 6 months of your salary, so you don’t have rely on credit. Using credit can be counterproductive as you will be left with a huge debt and accumulating interest to settle long after.
If are yet to have an emergency fund, then its best to start one up immediately before the next recession hits.
Put in Place a Budget and Pay Down Your Debts
A budget would help you track your income and expenses and reduce waste. It will help you identify spending areas to cut back from and as a result mange your money better. A budget will help you live within your means and where to channel money earned or saved.
A debt is a burden and during a recession it could add more stress to an already stressful situation, so it makes a lot of sense to try and pay down debt. During a recession, money is tight and it can be tough covering day to day expenses, let alone debt payments. Debts could easily spiral out of control during such moments and its best to begin to work towards cutting down debt.
Its very risky to be carrying a large amount of debt as a slight change in external forces could affect your ability to pay. Eg. A hike in interest rates by banks or a job loss could alter your ability to pay your debt, making things worse.
Live A Frugal Life
A frugal lifestyle is a great strategy as it makes you learn how to do more with less. It increases your savings and saves you the trouble of adjusting when a recession hits.
Living frugally isn’t about pinching pennies or denying yourself the good things of life. Its more about making conscious spending choices that reduces expenses, with little impact on your lifestyle.
Examples of being frugal, is a family reducing their number of vehicles from two or more to one. Another example is buying a more fuel efficient vehicle to save on the cost of gas. Downsizing your home or leasing out some spare rooms, spending less on groceries and reducing your cell phone plan are other examples.
The key in living frugally is not to make too extreme cuts, or it will be difficult to sustain in future. Frugal living is learning to get by with less and this is critical to recession proof living.
Diversify Your Income
Multiple streams of income is key to recession proof living. Putting all your eggs in one basket is a big risk, because it could result in income loss and your ability to meet up your financial obligations.
Having multiple streams of income is great, as there is another income stream to fall back on if one dwindles or gets eliminated completely. Income diversification doesn’t necessarily mean getting another job, it could also mean having a wife who is working in another industry. If you desire to bring in more money home and improve your ability to save more, then diversifying your income streams is key.
Buying a rental property, getting a weekend job, renting out space in your garage, starting an online business and becoming a freelance writer are all examples of how to diversify income streams. Any talent or skill you have could be put into good use and bring in more income.
Diversify Your Investments
Putting all your investments in one class could be ineffective and disastrous. Its important to have a diversified investment portfolio. A stock market crash could result in your investments being wiped out, if there were all in stocks. You should also re-diversify even within classes, for example, you should not have all your investments in the stock market in one company.
Your investment portfolio should be spread across different industries and different types of assets. This reduces your risk in the event of market downturn.
There are several investment vehicles including real estate, stocks, bonds and others. You should also consider diversifying your investments within countries to reduce your vulnerability to an economic downturn.
To survive a recession or recession proof your finances, you have to prepare ahead of the next recession. Put in place a healthy emergency fund, live a frugal life, diversify your income and investments to help you survive a recession.
We cannot control when the next recession will occur but we can prepare ourselves for it and respond accordingly. Implementing these money saving tips now to safeguard your finances in future can make so much difference.