About 13 years ago, the global economy was hit hard by a recession triggered by the US mortgage crisis. Back then, the overwhelming majority of us were caught off guard, mostly due to our limited understanding of the crisis. However, in the current state of economic distress, we all know that we are already in a recession.
The ongoing pandemic has led to a number of social limitations that have never been seen before. As a result, businesses have closed, leading to millions of layoffs and temporary layoffs. According to the Congressional Budget Office, we’ll see unemployment rates as high as 16% this year in America. Unsurprisingly, this is worse than the Great Recession of 2008, when unemployment peaked at 10%.
In these uncertain times, mastering your spending habits can lead you not just through the recession, but can also strengthen your financial stability. Here are five strategies to help you navigate though these tough times:
1. **Save Money**: During economic downturns, it’s crucial to save every possible penny. This might involve limiting your spontaneous spending to around 30% of your net earnings (after taxes). Making a monthly budget can help make this easier. Prioritize your basic expenses such as rent, groceries, and utilities, and cut back on unnecessary expenditures. Try to avoid eating out too much, and instead prepare your meals at home to save money.
For unavoidable expenses, search for deals and discounts, even for basic necessities such as groceries and personal protective items.
2. **Explore Certificates of Deposit**: As a response to a recession, the Federal Reserve tends to lower interest rates to encourage spending, which in turn makes loans cheaper. With banks subsequently lowering their own rates, it may be worth limiting the balance in your checking account and considering high-yield savings or certificates of deposit (CDs). CDs usually provide better returns than Savings accounts and, as they have a fixed return rate, they protect you from the unpredictable nature of a recession.
3. **Avoid Incurring More Debt**: Many people borrow money during economic downturns in the hope to quickly recover. However, predictions about the future can often go awry, and incurring more debt can often be a signal that you need to reconsider your budgeting or sell off non-essential assets.
4. **Pay Off Existing Debts**: Aim to reduce any existing high-cost debts, such as credit card balances – this must be a priority. With the current volatility of the job market, discharging your liabilities can help maintain control over your situation.
5. **Invest in Your Skills and Education**: During a recession, typically those without college education are the first to be let go, whilst those with a degree generally have more job security. Therefore, investing in your skills and training may prove invaluable during these tough economic times.
While businesses are starting to re-open across the country and the stock market is picking up, the absence of a vaccine and rising cases mean we are far from clear of the woods. It’s paramount to stay prepared and manage your resources diligently. By making the necessary adjustments during these trying times, you can emerge with better financial habits that will benefit you even in a recovering economy.
