Recession is like a bad penny that always turns up. A recession occurs when the economy stops growing. It is a widespread phenomenon, but experts cannot predict it. It causes wreak havoc on the financial lives of millions of people. The outbreak of COVID19 has been the recent example of a worldwide economic recession.
A complete lockdown put life at a halt. It closed all doors to cash coming in, and the global population had to dip into savings. Of course, some of them were lucky that they got an opportunity to continue work from home, but some faced an immediate downfall, especially daily wage earners.
The impact of recession varies from individual to individual. It is hard to prognosticate the effect of the recession, but you cannot bury your head in the sand just because you do not know it is on the horizon.
Most of the people have multiple income sources to withstand the recession hit but get failed because sometimes all sources stop generating income, and coronavirus outbreak have proved this fact. Here is what you need to do a recession-proof financial condition.
Build up an emergency fund
It is a common belief that an emergency cushion should be worth three to six months of living cost, but many of you shrug it off during the recession. A recession period can be extended, and if you had savings worth three months, how would you manage to survive?
The economy was out under the lockdown during COVID19 for around two months, but it is still wobbling, and people are struggling to make ends meet. So, you must have an emergency cushion that you dip into when the cash stops coming in.
Building an emergency cushion is not an overnight process. It takes a lot of time, and you will succeed only if you stick to your goal. First, you need to evaluate your monthly expenses to know how much you have left at the end of every month.
Take stock of all your essential expenses like rent, debt repayments, mortgage, and the like. Add up all these expenses and multiple them by 3, 4, 5, 6, or 7, depending on the monthly length of the emergency cushion you are aiming at. Of course, you must have an emergency cushion for a more extended period to withstand the recession.
Once you have set the goal for the size of emergency funds, you need to decide the amount every month you will set aside. If your income is not high, you should stash away at least 10% of it. However, it can go up to 20% if you earn the right amount of money. Stick to your goal so that the size of the cushion keeps growing.
Stay ahead of your debt
Debt obligations are one of the most significant causes of being in the tight spot. As it eats up a large chunk of your money, you are left with little income that is insufficient to keep the wolf from the door.
If you have been juggling with debts, now is the time to make a repayment plan. If you find yourself with meagre income during the recession, you will have fewer obligations.
Another benefit of having minimum debt is you can take out loans for unemployed with bad credit in case you lose your job at that time. During the recession, the lending market hesitates to lend money if you already have debts. Bear the following points in mind to settle all your dues as quickly as possible:
- Go through your monthly expenses to see if you have been spending more than you need. If there are any discretionary expenses, cut back on them.
- If you are spendthrift, set aside money immediately as you receive your paycheque so that you can pay off on the due date without any problem.
- If you have been juggling with multiple debt repayments, you should pay off those first that carry low-interest rates.
Keep tabs on spending
Just because you are earning the right amount of money, it does not mean that you will spend money like water. You will have to be careful with your spending. You must know where and how much your money is going. Checking out your expenditure is more crucial if you are building an emergency cushion.
However, it is not possible unless you create a budget. Budgeting can help you be on top of your expenses. It can help you manage your savings, outgoings, and investments. You can use budgeting apps if it seems complicated to create a budget on a spreadsheet. The more careful you are with you every time, the more savings you will have.
Nobody can accurately predict the recession, but you can minimize the brunt by maintaining stability in your financial condition. The economy rises and falls and then rises. If there is a downturn, the upturn will also come. Preparing now can help you withstand even the worst impact of the recession.