Economic uncertainty has become all too familiar as the specter of recession looms over many households. With the UK entering what economists describe as a 'technical' recession, the quiet whisper of financial strain is transforming rapidly to something much louder and more persistent. Understanding how to manage finances during these turbulent times is not just sensible, it’s absolutely necessary.
Recently, various experts shared their insights on how individuals and families can recession-proof their finances. We pulled together several actionable steps anyone can take right now to safeguard against this financial storm. Think of it this way: just as one would prepare their home for extreme weather conditions, getting your financial house in order is equally important.
Don’t Panic: A Calm Mind is Key
The first step experts suggest is straightforward yet surprisingly critical — don’t panic. According to Howard Dvorkin, chairman of Debt.com, the best decisions often come from clarity, not chaos. “If you know bad weather is on the way, you wouldn't wait until moments before it strikes to gather supplies,” he explains. Familiarizing oneself with the nature of economic downturns — recognizing their inevitability and cyclicality — can provide much-needed context and calm. The stock market, for example, has its ups and downs; recessions are merely part of its lifecycle.
Secure That Emergency Fund
Next up, is solidifying one’s emergency fund. According to Alexander Lowry, director of the Master of Science program at Gordon College, the average American struggles to cover even small emergencies, let alone significant financial setbacks. Experts typically recommend having three to six months' worth of living expenses saved up, but even starting with one month can give you peace of mind.
Setting aside funds regularly and ideally parking them in high-yield savings accounts can make this goal seem less overwhelming. This cushion can help cover rent, groceries, or other necessities should income take a hit.
Debt: Reduce Your Load
Almost every financial expert stresses the importance of tackling debt, especially high-interest credit card debt. Erin Lowry, author of “Broke Millennial,” notes, “Paying down debt aggressively now can alleviate pressure later.” The goal is to eliminate any debt before the financial climate worsens, reducing the risk of falling behind when the going gets tough.
Create and Maintain Two Budgets
Having two separate budgets is recommended: one for day-to-day living and another for potential difficult times. A ‘doomsday budget’ helps you plan for reduced income, focusing strictly on essentials like food, housing, and transport, cutting off non-essential lavish expenses. Dvorkin mentions software tools like Mint or Tiller as viable options to streamline your budgeting process, helping to track your spending effortlessly.
Diversify Investments
Many financial experts recommend diversification, particularly during uncertain times. Danielle Kunkle Roberts advises maintaining around 40% of your assets liquid, whether parked in cash equivalents or short-term bonds, and the remainder remains invested. She explains the long-term benefits of keeping some money cycling through the market, even amid downturns.
If you’re younger, you might even leverage dollar-cost averaging — purchasing investments consistently even when the market dips. It allows you to buy lower when prices drop, enhancing your potential returns when the market rallies again.
Stay Your Course with Retirement Plans
Preserving your retirement contributions during downturns is fundamental, say experts. Lowry recommends not to stop contributions to your 401(k) or IRA due to market volatility. If nearing retirement, consulting with financial advisors to assure your assets are strategically positioned can prevent long-term damage to your retirement plan.
Leverage Saving Apps
Modern technology can be your ally. Money-saving apps like Ibotta, Swagbucks, and Rakuten can turn everyday shopping or spending habitsinto cashback opportunities. "We save hundreds each year using these apps," says David Cahill of FinanceSuperhero. The key is to utilize these savings before you need to touch your emergency fund.
Create Additional Income Streams
Lowry suggests creating additional income streams to buoy your finances. Explore opportunities for side hustles, from driving rideshares to freelance gigs, enabling you to strengthen your financial base. Potentially, these can provide significant cash flow during job stability threats.
Using any additional income to build your savings can be tremendously effective. Setting aside every dollar earned from your freelance or side gigs can expedite your fortress-building efforts to withstand financial hits.
Invest in Yourself
Finally, during these precarious times, it’s worth ensuring your value as an employee remains high. Keep your resume updated and look for ways to improve skills or gain new ones within your organization. Investing time and resources to learn can help you maintain job security and let employers see you as more than just another number on the balance sheet.
Seek Help When Needed
If you find yourself overwhelmed by existing debt or facing financial struggles, do not hesitate to ask for help. Setting appointments with financial advisors or turning to demand-side advocates can keep you from sinking under financial distress. Your wellness is just as important as your financial stability.
This economic downturn could be just another phase, but being prepared and responding proactively can secure your financial future during uncertain times. Remember, preparing is not just for homeowners during storm season; it’s equally applicable to your finances during economic downturns. Take the first steps today and find peace of mind tomorrow.