How To Recession-Proof Your Finances
- Gross Domestic Product (GDP) fell for the second consecutive quarter at an annual rate of 0.9 percent.
- As a result, it is more critical now than ever to prepare for the worst-case scenario.
- The best way to weather the recession is to ensure your finances are in good shape.
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According to a recent report, Gross Domestic Product (GDP) fell for the second consecutive quarter at an annual rate of 0.9 percent. When GDP consistently falls, this means that the economy is going into a state of recession.
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What Is a Recession
A recession is a significant, widespread, and long-term decline in economic activity. One popular rule of thumb is that two consecutive quarters of decline in a country's Gross Domestic Product (GDP) constitutes a recession.
A recession can mean fewer jobs are available, so people with debt may struggle to pay it off. In addition, people tend to rely more on credit cards and loans during hard times, increasing debt ten times over. So how do you ensure your financial situation doesn't suffer during a recession?
Getting Ahead
Although there are no guarantees of what will happen regarding the economy, these steps will help you get ahead of the curve and be less vulnerable during the recession.
Whether you're just starting a career or have several years under your belt, building a financial future is essential to everyone's life. But during the recession, it can be hard to predict where things are heading regarding being financially secure. Therefore, preparing for the worst-case scenario is more critical now than ever.
Here are some strategies that will help you recession-proof your finances:
Recommended Read: 5 Ways To Save Money During A Recession
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Create An Emergency Fund
Set aside six months' worth of expenses to create an emergency fund. No amount is too big or too small. The key is to start somewhere and start with an amount you can afford. Whatever size contribution you make, you are taking action to save money for a rainy day.
If you lack the discipline to set aside money on your own, set up automatic contributions to come out each pay period. Regularly contributing to your savings account each pay period can help you develop an important savings habit.
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Eliminate Credit Card Debt
Reduce as many monthly expenses as possible. Begin with high-interest credit cards.
The Fed's four hikes in 2022 raised rates by a total of 2.25 percentage points, meaning consumers are now paying an extra $225 in interest on every $10,000 in debt. Having a revolving balance each month can cost you thousands of dollars.
Eliminating credit card debt frees up income that can be used to build an emergency fund or pay down other debt.
Recommended Read: Americans Rely More on Credit Cards Due to Inflation
Use Rewards Programs
Cash-back rewards cards can be an excellent way to recoup some of the extra money you're spending due to inflation.
Many businesses provide incentives to customers who spend money with them. You can use these reward points to get discounts on items you usually buy or even cash them in for cash back. You can also use these points to pay off debt, making saving money for emergencies easier.
There are tons of different reward programs out there. Some even offer cash back on things like groceries or gas.
Cut Back On Unnecessary Spending
Reduce unnecessary spending: If you're like most people, you probably have some things in your life that aren't necessary but add up over time, such as eating out too frequently or buying too many clothes on sale at department stores. Use the following tips to reduce unnecessary spending so you can put more money into savings accounts or pay off debt faster if necessary:
- Eat out less
- Sale or donate clothes
- Unsubscribe from sales emails that entice you to spend
Consolidate Your Debt
Debt consolidation can be complex because it requires discipline and self-control; however, if done correctly, it will pay off handsomely! Consolidating your debts entails combining all of your debts into a single loan with a lower interest rate, so you only have one payment each month rather than multiple smaller payments.
Once all debt has been consolidated, the money you have should go into savings or be put toward the principal amount on your consolidation loan. Don't think of it as extra money because that will entice you to spend it. Instead, it is the money you would have used to pay off your other debt had you not consolidated. Understanding this simple tactic can keep you on the right track.
Recommended Read: Should I Consolidate My Credit Card Debt
Diversify Your Investments
An economic downturn could be a financial disaster if most of your money is invested in the stock market. So instead, diversify your investment portfolio by investing in other types of assets, such as contributing to a 401K or buying a piece of real estate.
It is possible to get ahead of your finances during a recession. Don't panic and stay the course. People tend to pull out all of their investments during a downturn in an effort to turn their assets into quick cash. Having other investment vehicles that will hold your financial value is better than pooling all your money into a savings account due to inflation reducing the dollar value.
Diversify Your Income
As well as diversifying your investments, you will want to do the same with your income.
If you work a traditional job, it's essential to have another source of income that is not tied to your primary job. When one revenue stream takes a hit, you have another revenue stream to continue living on. This is the beauty of having multiple streams of income.
You can take on getting a second job or use your skills to create a side hustle. Take classes to learn new skills—network amongst like-minded individuals who can help elevate you when needed.
Diversifying your income has many advantages. By doing so, you and your company may build a financial safety net that will enable you to weather bad times, take advantage of new possibilities, and discover new skills and talents.
Recommended Read: How To Increase Your Assets
Watch Your Mental Health
With bills to worry about and no idea what your financial future holds, your stress levels can skyrocket. Social media and news outlets can also add to it. Take care of your mental health but cut back on all things that can negatively influence you. Focus on taking care of yourself and getting ahead on your finances rather than the negativity around you.
Practice self-care, go to therapy, spend time with nature, read a good book, binge-watch your favorite show, or enroll in classes to learn new skills to keep your mind in a good state. Too much negativity can leave you feeling defeated and feeling like you don't have the power to change your life when you do.
Money Takeaway
Getting ahead of the recession consists of creating an emergency fund, eliminating credit card debt, cutting back on unnecessary spending, consolidating debt, diversifying your investments and your income, and watching your mental health.
The best way to weather the recession is to ensure your finances are in good shape. Live within your means so that when times get tough financially, it doesn't feel like such a struggle because there isn't as much stress involved in making ends meet each month.
We cannot control a recession, but we can control how we prepare for difficult financial times.