The economy is said to be in a recession when it shrinks for at least two consecutive quarters. Shrinkage, or negative growth, in the economy means that there has been a fall in the number of goods and services being sold, and there is not enough employment for everyone.
Recessions come and go, some lingering longer than others. Regardless of their duration, a recession can have devastating consequences for any business. For everyone, it is prudent to consider how a recession will impact your finances and how prepared you are to cope with a negative economic environment.
Here are a few ways you can prepare for a recession:
Reduced job security is one of the biggest concerns associated with a recession. Establishing an emergency fund sufficient to cover you for between three to six months of living expenses should be your top priority.
Of course, reducing any debt you have goes hand-in-hand with saving. There is little point saving £100 each month, only to be paying £110 in credit card interest.
You only need to start small with your savings, and the important thing is to get started. Don’t be too concerned about interest rates. Yes, it is great to have your savings earning while they’re stashed away. However, this saving exercise aims to establish an emergency fund. When you’ve got that sorted out, then you can think more about interest.
If you already have some savings, but they are locked away, it might be a good time to switch them to a more accessible account. That way, you can get access to the funds when you need them.
Cut Down The Interest On Your Debts
We mentioned above the importance of reducing your debt, as the interest payments can hobble your chances of saving. An excellent way to help you get your debt down is to switch your debt to a lender with lower interest. Some credit card companies will offer introductory periods with zero interest.
Of course, there are usually fees involved, but these are small compared to the savings you can make not paying interest. If you choose this route, you must ensure you pay off as much of your debt as possible during the introductory period. After this time has expired, your outstanding debt will revert to a high rate of interest. What you are looking for is a company offering 0% interest on balance transfers. One downside is that doing this will leave a negative mark on your credit score, but the benefits of reducing your debt should offset this.
Develop a Back-Up Budget
You should look at creating a budget to see you through the economic uncertainty. You’ll likely have a few treats or non-residential purchases included in your current spending plans. This level of spending may be okay when the economy is doing well, but you might need to cut out all but your necessary expenses during a recession.
Your back-up budget will allow you to gauge what your life will be like living on just the necessities. Once you’ve budgeted all the essentials, you might be pleasantly surprised at what you have leftover.
Don’t go crazy and allocate the excess amount, but feel satisfied that there might be room for a few treats to see you through the recession.
It is difficult to predict when a recession will hit and how long it will last. Hopefully, following these few steps will help prepare your finances when we arrive in an economic downturn.