The beginning of the year is a great time to start
Recession or an economic downturn may affect the finances of an economy pretty badly and that’s what many Americans and people worldwide are worried about. With rising debt levels, dropping oil prices, and fluctuating markets you might be looking for a lifesaver to recession-proof your finances.
According to the World Bank forecasts, “the global economy will shrink by 5.2% this year.1 That would represent the deepest recession since the Second World War, with the largest fraction of economies experiencing declines in per capita output since 1870”.
Unfortunately, recessions are inevitable and something beyond our control. In June of 2020, The National Bureau of Economic Research announced that the U.S. economy was officially in a downturn.
For many individuals who have not yet been impacted by the loss of jobs, you can prepare and respond to this financial recession by applying several tips and taking precautionary measures to protect your finances.
In this article, I will share five simple tips to protect and recession-proof your finances.
1. ESTABLISH OR INCREASE YOUR EMERGENCY FUND
Emergencies are unpredictable. Loss of employment is one of the most common issues many Americans deal with during recessions. Building an Emergency fund can make it possible for you to afford your daily expenses even if you’ve lost your job and are searching for a new position.
According to Lauren Anastasio, CFP, a wealth advisor at SoFi, a personal finance company “Everyone needs to boost their emergency fund even if they’re paying high-interest rate debts. So you’ll need to focus first on loading the emergency fund that allows you to meet your expenses of at least one month and then you can pay off your debts.”
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2. FOCUS ON THE NECESSITIES
One of the best ways to live within your means is that your spending should align with your goals. If you have not yet established your financial goals, now is a good time. When you separate your needs from your wants, you easily begin to identify spending habits that can be eliminated, allowing you to save more.
Andy Mardock, the founder of Vivify planning, makes some excellent points in recommending that you need to monitor your expense, and separate your nonessential things from your fixed expenses to survive during the recession. It is also the perfect time to create a monthly budget and make sure you are not overspending.
Experts suggest that spending more than 30% of your net income on discretionary items might make it difficult for you to meet your fixed expenses during a recession. Your focus should be on essential expenses like house rent, car insurance, groceries, and utilities instead. Putting it quite bluntly, this is the time to cut out all unnecessary spending.
Related article: Ten Quick Ways to Find Money in Your Budget
3. DIVERSIFY YOUR PORTFOLIO
The inherent risk of one source of income, especially if it is from a job, is that if you lose your job, you will also lose your only source of income that is necessary to meet your financial obligations. Therefore having multiple streams of income can be extremely helpful. If one out of your multiple income sources gets eliminated you’ve other sources to help you during the recession.
Diversifying your portfolio doesn’t necessarily mean finding a second source of employment. If your spouse has a job some of your income diversity is right there.
You can also look into many other options such as renting out space in your garage or purchasing real estate and renting it out or repairing and flipping it.
It is also essential to diversify your investments. Make sure your investments are spread across various industries because if you have most of your money tied up in one type of investment then a recession could be your financial disaster. Investing in mutual funds, index funds, or exchange-traded funds are great ways to diversify your portfolio.
In this video, I discuss the key differences between the three investments and the pros and cons of investing in each. Obviously investing in the stock market is also an excellent way to gain returns, but you must ensure that with any investment decision you make, you perform your proper due diligence, and understand your risk tolerance.
By performing a combination of these steps, you are diversifying your portfolio and you are recession-proofing your finances.
4. CONSIDER YOUR CREDIT SCORE
Your credit score is your report card which lenders (Banks and Financial Institutions) use to determine your ability to repay the borrowed money. The reason to maintain a good credit score is that lenders may tighten up their eligibility criteria if you are applying for a personal loan during a recession. This is because they know that there is a higher likelihood of individuals defaulting on their loans.
By having a good credit score, you will have easier access to borrowing at more favorable rates and receiving a higher loan balance. According to Nerd Wallet, “ People with less than moderate credit score might find it difficult to approve their personal loan application”. However, credit scores can easily be improved by paying bills promptly and by keeping your oldest credit cards open. If you have less than perfect credit, Grab a copy of this book, “YOUR ROADMAP TO 850: The Ultimate 6-Step Guide to a Perfect Credit Score”, to start increasing your credit score and put yourself on the path to better credit and debt management.
5. INVEST FOR THE LONG TERM
Having been a long-term investor for over 20 years, I have reaped many benefits. I recommend purchasing stocks and holding them for 5 -10 years and beyond. Any earnings on those investments can be reinvested, resulting in greater gains over a long period of time. The longer you have your money in the market, the greater the compounding, and therefore the larger the growth. Do not neglect retirement plans as a way to continue to grow your wealth.
According to global investment bank Goldman Sachs, 10-year stock market returns have averaged 9.2% over the past 140 years. Between 2010 and 2020, however, the investment bank noted that the S&P 500 has done slightly better than the historic 10-year average, with an annual average return of 13.6% in the past 10 years.
It is obviously very difficult to predict the future, and while we are in a recession, the depression can be avoided if the government takes prudent steps to contain the virus, and provides a stimulus package to boost the economy and help families who have been plunged into poverty.
For each of us individually, having a healthy emergency fund, exercising prudence in our spending habits, and finding ways to diversify our income sources can stave off hardship as we weather this period.
Using all these tools will help you to not just survive, but to thrive during a recession.
Tanya Taylor, CPA, MBA is the founder and CEO of Grow Your Wealth. Her mission is to empower women and BIPOC families with the tools to become financially empowered by meeting them exactly where they are – whether it is repairing credit, demolishing bad debt, investing and creating multiple streams of income, tax planning and protecting their wealth so that they can enjoy life, and leave a legacy for generations.