Are You Prepared for a Recession?
The spread of COVID-19 and the subsequent global lockdown have unfortunately led to a series of en-masse lay-offs and the threat of economic downturn, with 10 million people already filing for unemployment. It’s affecting the way we buy real estate, and it’s surely going to impact consumer habits in many other areas.
Whether you’ve already been negatively impacted by this or you’re just anticipating leaner times, one thing is certain – we all have to learn some financial coping skills and how to budget, save money, and manage our finances in a way that reduces our expenses as much as possible for these upcoming rainier days.
Do You Have Debt?
Should you become impacted by the recession because of job loss or a pay cut, the last thing you want is to have outstanding financial obligations. That includes your mortgage, car payments, and general loans, but the worst of it is high-interest debt such as personal loans or credit card debt.
The average American holds $16,259 in personal loan debt and a $6,194 credit card balance, according to the Experian Consumer Credit Review.
Here’s what you can do: This needs to be prioritized, more than anything else on your plate, because it is likely to become your biggest financial drain. Here are some tips:
- If you’re among the 67% of US consumers with a credit card, avoid using it or if absolutely necessary, make sure to pay off your balance at the end of the month.
- If possible, start making larger payments towards your high-interest debt. The more you pay off while you still have the means, the less you are going to worry about if things get tough.
- When choosing between different loans to pay off, pay your student loan last. Compared to other types of debt, like credit card debt (20.71% APR) or personal loans (17% APR), student loans leave you in a less precarious position, financially, with an APR of 4.53%.
Do You Have Savings?
Financial experts typically advise paying off debt first, before saving. That is because interest rates on debt are much higher, so you’re acquiring more debt than you’re saving. However, an exception must be made for emergency savings.
When there is a threat of recession, savings become even more important. You must protect yourself against potentially devastating occurrences such as job loss by ensuring an emergency nest egg.
Here’s what you can do: Almost 40% of American households cannot afford an unforeseen expense of as little as $400, according to the Federal Reserve. Unfortunately, a recession requires healthier savings:
- Start with setting aside money to cover one month’s worth of living expenses. Any amount is better than nothing. This is your emergency fund until you can save more.
- Once you have an emergency fund, you should aim to save enough to cover 3 to 6 months of regular living expenses. Especially preparing for job loss, one never knows how long they will be unemployed for.
Do You Have a Steady Job?
People all over the world are facing situations where they are fired, put on furlough, are having their hours cut or their pay cut. Even if you do not anticipate losing your job, it is essential to have a back-up plan.
Savings will only take you so far, but you may find yourself in a situation where you need more help than just budgeting and saving can achieve. Ideally, you would start looking for alternative employment.
Here is what you can do: The good news is that there are opportunities for you to make money even while sitting at home, in quarantine. All you need is a laptop and an internet connection. Here are some of the gigs you can get online to supplement your income:
- Personal assistant – Online businesses are still operating, and some of these entrepreneurs need assistants. Even on a part-time basis, being an assistant is an easy admin job you can do from home.
- Translator/English teacher – If you know a second language, translating services are always welcome. Even if you don’t, native English speakers are in demand to teach students online. With schools and educational centers being closed, this is your chance to make some extra cash.
- Online shop – If you have any practical skills, you can supplement your income by creating handmade decorations, clothes, or wedding invitations and favors. Purchasing power may be decreasing, but ecommerce is one of the only areas of retail that has not come to a complete standstill. Use that to your advantage.
Can You Afford Your Mortgage?
For most people, their mortgage payment is the biggest expense in their household. You may find that in this situation, you are struggling to make the payments, or cannot afford them at all. If there is nothing else you can do to decrease your expenses to a point where you’re comfortable with them, it may be time to make some difficult choices.
Here is what you can do:
- Sell your car – If you’re fortunate enough to have a two-car household and don’t absolutely need both, then it may be a good idea to let one of them go. That would provide both an influx of cash and a reduction in maintenance expenses for an additional vehicle.
- Downsize to a smaller home – It can be heartbreaking to downsize, but sometimes, it’s the only solution that saves enough money. If you own, you can sell to buy a smaller house, or even an apartment. Ideally, your mortgage will go down and you’ll still have enough left over to set aside in savings or pay some of your other outstanding debt.
- Take in a tenant – You may want to explore the option of bringing an extra person into the household, if you’ve got the space. The extra money can secure your mortgage payments, and generally speaking, recessions are strangely good for the rental industry – people aren’t buying houses, but they’re still renting.
Uncertain times are ahead of us, but that doesn’t have to mean we need to panic. Some of us will be impacted more than others, but regardless of where you stand, it’s a good idea for all of us to exercise some restraint and financial caution in anticipation of leaner times.
Cutting down your expenses is never comfortable, but you can soften the blow by making some smart changes and prioritizing necessities at this time. From budgeting strategies to setting up savings goals and even taking on some extra work, you can make the transition just a little bit smoother for you and your family.
You may also be interested in: How to Improve Your Relationship With Money
Writer: Maria PikeDisclaimer: All investing can potentially be risky. Investing or borrowing can lead into financial losses. All content on Bay Street Blog are solely for educational purposes. All other information are obtained from credible and authoritative references. Bay Street Blog is not responsible for any financial losses from the information provided. When investing or borrowing, always consult with an industry professional.