According to the National Bureau of Economic Research, recession are defined as “a significant decline in economic activity spread across the market, lasting more than a few months, normally visible in the real gross domestic product (GDP), real income, employment, industrial production, and wholesale-retail sales”. Recessions generally occur when there is widespread uncertainty or a significant drop in production or spending. This drop-in spending can be triggered by a variety of different events, such as a financial crisis, an external trade shock, an adverse supply shock, or even the bursting of an economic bubble.
Here are 8 financial literacy tips that will help you during a recession
Increase your savings
While your ability to earn money in a recession may sometimes be hindered, many of your fixed expenses will likely remain the same. The best for you is to have savings in place to keep you protected and your monthly bills paid. It will be wise to create separate savings accounts, but it still needs to be an account that allows you to withdraw funds easily in case you are ever in a position where you are experiencing a few months without a pay check.
Reduce your expenses
One of the ways to help increase your ability to save is to cut down on your expenses. If you are struggling to identify areas where you might be able to pull back on spending, here are few tips: Always compare prices from multiple retailers
- Cancel the gym membership and work out at home
- Replace sodas, juices, and other drinks with water
- Cook at home instead of ordering takeout.
Bulk up your emergency savings
It’s very crucial to have emergency savings in place as you work on recession-proofing your finances. In a recession, having an emergency fund can save you a lot of stress. It can also help you avoid becoming financially over-extended or having to leverage debt just to survive. Recessions can be unpredictable, aim to boost your emergency savings. This will give you ample time to find a new job.
Pay off debt
The last thing you want to do is worry about having to pay off the debt in a bad economy, especially with the increased rates of unemployment. Paying off your debt will save you a ton of money in interest payments. Plus, you will also be able to put your extra funds bulking up your emergency savings and other financial goals
It’s a good idea to focus on paying off your high-interest debt before you consider ramping up on investing. This is because if you have high-interest debt, the cost of your interest payment may far exceed the return on your investment.
Budget and live within your means
Living within your means is the key to building wealth. It also means you eliminate having to leverage debt to live your life.
Wondering how to prepare for a recession and live within your means? Learn how to budget and determine what budgeting style works best for you. Your budget will help you track your expenses in comparison to what you earn and will highlight areas you can cut off. Your ultimate goal should be to widen the gap between your income and expenses as much as you can. You do this by increasing your income and reducing your expenses.
Create multiple streams of income
Creating multiple streams of income ensures that you increase how much you have coming in. And it also acts as a buffer in case you lose a source of income. An average millionaire has seven (7) sources of income, and for good reason.
Is there something you are passionate about doing? Something you do that you get complimented on all the time? Consider turning it into a side hustle to generate some additional income. There are also a variety of recession-proof businesses you can consider.
Diversify your investments
There is a saying, “don’t put all your eggs in one basket”. The same line of thinking applies to investments. It’s crucial to have a well-diversified investment portfolio. Making sure your investments are spread across multiple industries and areas is of great importance so that when one industry or area declines, it doesn’t sink your entire portfolio.
Whatever you invest in, be sure to do your research, be clear on your investment objectives and understand your risk tolerance. This will create less panic for you if a recession comes along.
Recessions can be frustrating, discouraging, and can throw you off track when it comes to reaching your financial goals. The good news, though, is that they don’t last forever. Remember that recessions are only temporary setbacks. Stay positive and continue working towards your goals. Before you even realize it, the economy is bound to pick up.
While you can’t predict when a recession will happen, it makes sense to always be prepared. If you are wondering how to prepare for s recession, these tips should get you started.
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