Budgeting for an economic downturn

Budgeting for an economic downturn

Many economists are watching 2023 with a careful eye; there are indicators that a recession is coming. Inflation has been high, the Federal Reserve is raising interest rates, and although wages are going up, they’re not moving quickly enough to counteract the high prices most people are facing for basic necessities. So, what does that mean for you? First, take a breath. Recessions happen and they don’t last forever. Weathering the downturn is possible. Here are a few ways to adjust your budget, shore up your savings, and come out of the recession with your finances intact.

Step 1: Take stock of your income, expenses and…well, stocks

You can’t plan for a downturn without knowing what your current assets and liabilities are. Start out by looking at your income, your monthly bills, your credit score, and any retirement savings you have. Are you able to cut out any of the bills you’re paying currently? Can you increase your retirement contributions ahead of any market volatility? Are there credit cards or loans you can pay off outright? Find the right balance between the money you have coming in and the money you have going out and get financially healthy now, before the recession kicks into high gear.

Step 2: Set up an “Emergency Fund”

Maybe your car breaks down. Maybe you break your foot. Maybe your dog needs surgery. If your budget is stretched to its limit, how can you afford to overcome these unexpected setbacks? Start out by putting at least 20% of your paycheck into a savings account and leave it alone. This is now your emergency fund. Whenever the unfortunate occurs, you’ll have interest-free money set aside. Setting money aside in a SmartyPig account or separate bank account can help keep your emergency savings out of sight, keeping temptation low and your savings intact.

Step 3: Get thrifty

Spending wisely is just as important as saving wisely. Now, more than ever, there are ways to cut down on expenses when you spend. Sign up for loyalty programs at your gas station, grocery store, or anywhere you regularly spend. Keep an eye out for coupons that are tailored to your normal grocery haul and spending behaviors. Need some new clothes? See if you can buy them at a thrift shop or online at any number of secondhand resellers. Bills too high? Contact the customer service representatives at your cable or cell phone provider and see if you can leverage customer retention benefits. You could cut your monthly expenses significantly without sacrificing some of your comforts.

Step 4: Remember the fundamental truth about recessions

The one thing you need to keep in mind about recessions: they eventually end. Economies that cool can always heat up again and when they do, you will want to take advantage of the extra savings you’ve accrued to make the most of the upswing. If you’re currently renting, your extra savings could be parlayed into a down payment on your first home. If you’ve negotiated your bills, you may have extra room after the recession ends for revolving debt, like new credit cards or a car payment. Being smart with your money means you can do more with it when the good times get rolling again. It can be difficult to tell when an economic downturn is over, but getting through it is not impossible. Think of a recession as a rainstorm and economists as your local meteorologist: they can tell you it’s coming and they can give you a sense of how severe it might be, but they can’t guarantee that everyone will get the same amount of rain. Focus on keeping your expenses small and your savings big and you’ll be able to weather the storm.