Let’s face it. Inflation is at an all-time high, prices are soaring, and the cost of living is shooting up every single day. A recession or economic downturn can have a significant impact on everyday finances, and if it lasts long enough, can create a hole in your finances that you might just not be able to fill back up.
However, that’s where thinking smart comes into play. With strategic planning and smart decision-making, there are numerous ways you can recession-proof your life, ensuring that you not only survive but thrive, even in tough economic times.
We won’t bore you further with the economic state of the world. Here are 5 essential ways to protect yourself and your finances from the adverse effects of a recession.
Consider A Robust Emergency Fund
One of the most critical steps in recession-proofing your life is establishing a solid emergency fund. Think of this fund as a financial safety net, designed to cover your living expenses in times when regular income might be unstable or reduced.
According to a recent report by Personal Capital, more than 51% of people now prioritise having an emergency, and a big reason behind it was the enormous layoffs that companies did during the pandemic.
Starting small and consistently saving a portion of your income can gradually build this fund. Consider automating your savings to make the process easier and more consistent. The key is to keep this fund easily accessible, such as in a high-yield savings account, ensuring it’s there when you need it without the temptation or risk of investing it in volatile markets.
Don’t Put All Your Eggs In One Basket
Relying on a single income source can be risky, especially during a recession when job security is not guaranteed. Risk mitigation is one of the most important aspects of recession-proofing your life, and it’s often the one thing that most people get wrong. Here’s a detailed guide on how to diversify your income streams to mitigate risks.
Diversifying your income can provide a buffer against unexpected job loss or reduced work hours. Consider developing a side hustle, freelancing, or investing in passive income streams like rental properties or dividend-paying stocks to keep the ball rolling, even during economic downturns.
Having multiple income streams means that if one source dries up, you have others to fall back on. This approach not only provides financial security but can also offer opportunities to explore new interests and skills. Just be sure to choose side ventures that don’t overly strain your time or resources, and that align with your long-term financial goals.
Reduce Your Debt – As Much As You Can
Unlike Robert Kiyosaki, who praises the potential of using debt to get wealthy, things might not be the same for you. In fact, high levels of debt can be a significant liability in a recession. With job security in jeopardy and income potentially decreasing, large debt payments can become overwhelming.
WellsFargo makes a pretty straight-to-the-point guide on minimising debt, which includes paying more than the minimum, paying off your most expensive loans first, and so far and so forth.
You can also consider the debt snowball method, where you pay off smaller debts first to gain momentum, or the debt avalanche method, where you tackle debts with the highest interest rates first. Reducing your debt not only eases your financial burden but also improves your credit score, which can be crucial in securing loans with favourable terms if needed during a recession.
Adopting a more frugal lifestyle can make a significant difference in your financial resilience during a recession. This doesn’t mean you have to sacrifice your quality of life; instead, it’s about making more thoughtful spending decisions.
Evaluate your current spending habits and identify areas where you can cut back without impacting your daily life significantly. According to Consumer Finance, you can evaluate your spending habits by:
- Keeping track of your checking account and credit card history
- Consider signing up for a personal finance management tool
- Save your receipts – All of them. Various platforms allow tools to save and track your receipts.
- Consult with PFMs (Personal Finance Manager) to better their finance management.
Continuous Skill Development
The job market becomes more competitive in a recession, and staying relevant is crucial. Continuous learning and skill development can not only make you more employable but can also open doors to new career opportunities.
Invest in yourself by learning new skills, obtaining certifications, or even pursuing further education if feasible. Focus on skills that are in high demand and transferable across various industries. Networking is also vital; building strong professional relationships can lead to new opportunities and provide support during challenging times.
Recession-proofing your life is about being proactive and preparing for the worst while hoping for the best. By building a robust emergency fund, diversifying your income sources, reducing debt, adopting smart spending habits, and continuously developing your skills, you can create a strong financial foundation that can withstand economic downturns.
Remember, the best time to prepare for a recession is before it happens, so start taking steps today to secure your financial future.