How to recession-proof your budget

How the Recession Affects Your Budget

Recessions usually affect the economy on multiple fronts. For example, starting in 1929, the unemployment rate rose to 25% and 15 million people were unemployed. People lost $140 billion due to bank closings and the stock market fell 90% by 1933.

On an individual level, a recession can cause you to lose your job and be unable to meet your financial obligations. But it affects people in different ways depending on income level, spending habits, family structure and geographic location. Certain groups, such as women of color, minimum wage workers, and dependent families, are more vulnerable during a recession.

“Those who are already in a precarious position—those working low-wage jobs that prevent them from saving enough to bounce back when times get tough—may be forced into debt by the recession,” Levon L. Galstyan, a certified public accountant (CPA) with Oak View Law Group, e – wrote to The Balance in a mail interview.

“Those who have paid off their mortgage on their home may fall behind on payments, while those who have never owned a home may have to wait a little longer to buy a home.”

Fortunately, there are ways to prepare yourself for a financial crisis.

What to do before recession

Make sure you have a budget or review and update your current budget. You'll also want to prepare for the potential loss of income by building or maintaining an emergency fund, paying off debt, and networking or finding additional sources of income to fall back on.

Budget

Let's back up for a minute. If you don't already have a budget, the first step to preparing for a recession is to create one. It involves tracking your income and expenses and identifying areas where you can cut back or save money.

“No matter what budgeting system or app you use, you need to know what you can and can't afford,” Jay Zygmont, a certified financial planner (CFP) and founder of Childfree Wealth, wrote in an email to The Balance. .

If you already have a budget, make sure it's up to date – including your current monthly income and expenses.

Create an Emergency Fund

If you don't already have an emergency fund, this is one of the most important ways to prepare for tough times.

“During economic downturns, as businesses tighten their budgets, the risk of layoffs is very real,” Galstyan said.

If you are an hourly employee or freelancer, you may end up with fewer hours or fewer clients. Ideally, an emergency fund should be large enough to cover your basic needs for three to six months while you look for more work. These savings can allow you to avoid borrowing to pay off your debts.

“If you have a large emergency fund, you can avoid the long-term effects of a short-term job loss,” Galstyan said.

Reduce or pay off debt

High levels of debt are usually a source of strain on the budget because even if you lose your job, you have to continue to pay the debt. Failure to do so will damage your credit and could result in legal consequences.

That's why it's so important to pay off or at least reduce your debt before a recession hits. If you can, dedicate more of your budget each month to reducing your balances before the times get tough.

Network

If you're worried about losing your job, reducing your hours, or losing clients, build or maintain professional relationships to ensure you won't be out of work for too long.

Find an additional source of income

Having an extra way to earn money can help reduce your stress and increase your resilience to the challenges you may face during a recession. This includes starting a part-time job, working on a weekend freelance, offering a job, or investing in dividend-paying stocks. If you lose your main source of income, your side income can help you.

“In tough times, having a second source of income means the difference between sleeping comfortably and staying up all night worrying about money,” says Galstyan.

What to do in a recession

You may want to look for ways to reduce your budget by cutting non-essential expenses and finding cheaper alternatives when you can. You may also want to find ways to generate additional income, such as selling home goods.

“Focus on needs versus wants,” says Zigmont, CFP. “For example, groceries are a need, and eating out is a need.”

Look for Discounts and Payment Plans

Search for coupons and discounts on groceries, clothing and other essentials to buy.

“Whether it's utilities, phone service, cable, internet or car insurance, calling your monthly service provider to discuss bills can save you a lot of money,” Galstyan said.

Some providers offer deals for new customers, so consider switching to save money. You can also lower ongoing bills by signing up for a different plan or agreeing to paperless billing.

If that's not enough, you can request a payment plan for certain types of expenses, such as utilities. Providers usually won't let you off the hook for what you owe, but you can spread payments over a longer period of time, which can help lower your monthly costs until you get back on your feet.

Use 0% APR Cards

If you're running out of savings or just want to make sure you can stretch them out until you find a new job, . These cards allow you to pay off your debt without paying interest for the promotional period (usually six months to a year, but some deals last up to 21 months).

Make sure you pay everything before the promotion expires.

Apply for Government or Community Assistance

If you've lost your job and are eligible for unemployment benefits, apply through your state office, which has resources to help you find work. Other government or community programs may provide food assistance and emergency assistance for utilities, rent, and prescriptions.

What to tell yourself if things go wrong

You can do everything right and still be in financial trouble during a recession. Try to avoid panic. Acting out of fear can lead to poor decisions and make your situation worse.

“Focus on what you can control,” Zigmont said. “If you lose your job, get a part-time job or a gig the next day.”

The important thing is that you continue to move forward financially. Cut costs where you can and try to find a new job or a side job. Progress is the most important thing, even if it takes longer than you'd like.

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