Recessions can bring with them a lot of uncertainty about the availability of employment and income. This is why it is important to manage money in a way that one is prepared for any such unforeseen situations. A crucial measure here is saving as much money as possible. Building an emergency fund cannot happen overnight. To do this, one must build beneficial money management habits with the help of a few tried and tested strategies.
1. Use a high-yield savings account
Saving enough money to build an emergency fund is the simplest way to recession-proof finances. To grow savings, one can consider using tools like a high-yield savings account. This special type of account offers higher interest rates than one would get with a regular savings account. While holders can withdraw money from this account whenever they want, banks may set withdrawal limits and various rules. So, one must carefully review the terms before opting for this account. That said, HYSAs are often seen as great options for building wealth and saving for emergencies like recessions.
2. Review expenses and spending habits
One of the crucial budgeting strategies to prepare for tough economic times is keeping track of all expenses, big and small. Monitoring spending helps one keep unnecessary expenditures in check and make changes to their spending habits to save more money.
Additionally, as spending priorities differ for each household, tracking expenses can help one determine the precise amount of money they would need each month, even in a recession. Then, based on what one finds out, they can save enough money to sail through tougher times. To review expenses, one must download all of their bank statements and try to find answers to certain key questions.
- How much does one spend on avoidable activities like traveling for leisure, movie subscriptions, or eating out?
- How much does one spend on essentials like rent, electricity, mortgage, daily transportation, and other similar utilities?
- How much money has one saved so far, and can they save more?
Such a thorough evaluation is a key part of financial planning to be prepared for economic downturns and have enough money for essentials.
3. Tackle existing debts
The burden of debt can be especially difficult during a recession, as at this time, one cannot be sure about their source of income. So, it is important to reduce the amount one owes as much as possible when they have a stable job and regular income stream.
To reduce credit card and loan debt, one must first try to pay more than the minimum monthly repayment. To save money on interest payments, one can ask their bank or credit union if it is possible to make additional payments every month and put it towards their principal. In addition to this, one must build good money management habits to avoid managing debt during a recession. A beneficial habit is paying all bills on time. If one tends to forget due dates, one can either automate bill payments using an app or by speaking to their bank and/or set monthly reminders to avoid missing deadlines.
Finally, one must assess their debt burden and prioritize paying off credit card bills or loans that have the highest repayment interest rates. Getting such debts out of the way enables one to tackle smaller financial obligations in the future and protect their savings during an economic crisis.
4. Hold on to investments
Recessions are known to drive people to make impulsive decisions. So, it is common for people to try to get as much money as possible when the news of a recession hits. To do that, the first move many make is to sell their existing investments. Doing so can boost liquidity and prevent one from facing the worst of a turbulent market. However, this is not always the best move. While it can be difficult to stand by and watch investments lose value during the recession, pulling out of the market would only lock in the losses. Even if the possibility of the market rebounding seems unlikely, the safest move sometimes is to just wait and ride out the storm of recession. Often, the stock market’s greatest highs come on the heels of some of its worst days.
It is seen that most investors who grow their wealth exponentially in such situations did not anticipate such turnarounds but simply decided to hold on to their investments. Additionally, those who sell their assets to wait out the recession-driven volatility period will find it difficult to know the right time to re-enter the market. That said, it is best to consult a financial advisor to make an informed decision.
5. Utilize tax benefits
Reducing expenses is not necessarily the only way to save more money for tough economic times. One can also find ways to reduce the tax obligation. One such measure is relying on investments that offer tax benefits. For instance, certain retirement accounts, such as 401(k), 403(b), and 457(b) offer tax benefits. Any contributions made toward these accounts can be deducted from taxable income, reducing the tax liability. Roth IRA and Roth 401k accounts are also tax-free growth investments that allow one to grow their retirement savings.
