How to Save Money During a Recession
When most people hear the word "recession," alarm bells go off. Recessions are associated with financial disaster, and historically these economic dips have had serious impacts on consumers' finances.
Though a recession has the potential to throw your personal finances for a loop, with proper preparation and saving, you can limit the impact it'll have. Read on to learn how you can save money and prepare.
What Is a Recession?
Economic recession is a period of reduced financial activity that occurs consistently over a number of months. It can be hard to define when exactly a recession begins or ends, but economists tend to look at a few statistics, including how many people are working, how much money people are making, industrial production and the nation's gross domestic product (GDP), to determine a recession's general start date.
Until recently, the U.S. economy was in its longest period of economic expansion in history—an 11-year period of growth that began in 2009. This expansion ended with the onset of the COVID-19 crisis. In February 2020, the U.S. economy entered a recession, according to the National Bureau of Economic Research.
How to Prepare Your Finances for a Recession
Recessions are unavoidable and can be hard to predict. So even in times of healthy economic growth, it helps to be prepared for an economic downturn. Preparing for a rainy day now can save you trouble down the line.
Here are some ways you can prepare your finances for the possibility of a recession:
- Make sure you have an emergency fund. An emergency fund should be used to help you sustain yourself in times of need. It's recommended to save at least three to six months’ of living expenses in this fund. Having emergency savings when a recession hits could help you pay for essential purchases if you lose your job or your work hours are reduced. If you already have enough money socked away to live on for six months, it doesn't hurt to put away more than that if you can afford to.
- Live within your means. Spending more than you make is never good. When you live within your means, the total of what you spend in a month is equal to or less than the money you bring in during that time. This tactic will not only help save you money, but it will help ensure you're not overextended should your income be impacted by a recession. To figure out if you can afford your current lifestyle, total up all your current monthly expenses and subtract that number from your monthly income. If you still have money left over, you're living within your means. If not, you should consider cutting back where you can.
- Limit your existing debt. The less you have, the better off you'll be if a recession hits. When your income is reduced—or eliminated—you may have difficulty paying your debts. By limiting your debt while you have the means, you'll be setting yourself up for efficient spending should you need to tighten your budget.
- Have an emergency plan for investments. Unfortunately, recessions often coincide with downturns in the stock market. If you have a 401(k), or any other types of market investments, consider creating an emergency plan for what you should do if a recession hits and the market crashes. Market volatility can be scary, and planning ahead can help prevent you from impulsive decisions if the market changes. Consult a financial professional for advice on what plan is right for you.
- Try to find a “recession-proof” job. While this is not easy, having a recession-proof job could ease your anxiety if the economy begins to struggle. There is no technical definition of what industry is recession-proof, but historically, occupations that provide essential services could see less of an impact if a recession causes companies to reduce their employee numbers. Essential jobs can be found in the fields of teaching, accounting, medicine and more.
How to Budget in a Recession
Recessions can cause widespread unemployment and may cause you to change your spending habits. if the economy begins to slip. If you have a budget in place now, start to think about how it could be adjusted if your earnings were to change.
Look through your budget and group your expenses by their importance. Put all of your essential monthly expenditures (food, shelter, debt payments, utilities) in one group; put the important, but non-essential expenses (gifts, clothing, entertainment) in another; identify the things you could easily live without (streaming services, luxuries, gym memberships); and also note the amount you put toward savings (for your emergency fund, retirement, future home down payment and the like). Once you've categorized your spending, it should be easy to quickly change your budget should your income be impacted by a recession.
Remember that if you abruptly lose your job, you'll need to be ready to cut out non-essential purchases quickly. Preparing a plan for which expenses you would eliminate first could help you quickly make these changes, which may save you money and protect your credit.
Diversify Your Income During a Recession
One of the biggest risks consumers face during a recession is a loss of income. Unfortunately, there is no way to predict whether you'll lose your job or if your income will otherwise be impacted by an economic downturn. By diversifying your income, you can insulate yourself from potential risk should your main source of income be taken away.
To create a new stream of income, consider finding a side hustle, or something you can do easily in your spare time to earn extra money. Consider food or package delivery, tutoring, child care or other jobs suited to your skills and availability.
Different streams of income will not only protect you should an emergency occur, but they could help you beef up savings and pay down debt now. The lower your total debt balance, and the more you have in savings, the better off you will be should a recession hit.
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