What is a recession, and how do you prepare?
The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” This translates to a lack of economic growth, which is related to financial challenges such as higher prices, stagnant wages, rising unemployment rates, and increased debt balances.
Recessions can mean job losses or payroll freezes, inflation-driven interest rate increases, and higher living costs for average wage earners. Though experts cannot be sure how long a recession will last, there are ways to prepare and minimize financial stress during such a time.
Check in with your finances
How is your financial situation right now? Is your budget flexible enough to take on a surprise expense? It’s a great time to see where you are at with financial obligations, such as debt and other bills, and to check in with your budget. You may be making all of your payments, but if things are already tight, a recession could be particularly difficult.
If you don’t already have a budget, it’s important to set one up — even if it’s basic. It’s an indispensable tool to help you track and manage your spending. Start by figuring out your total monthly income and then make a list of your regular expenses. Experts recommend using the 50/30/20 rule for budgeting, which dedicates 50% of your monthly income to necessary expenses like rent/mortgage and utility bills; 30% to wants, such as entertainment or shopping; and 20% to debt payments and/or savings. A budget can help you find places to cut costs and save more.
Look for ways to cut daily costs
There are a lot of little ways to save that can add up. Some ideas include using coupons, taking advantage of sales, eating out less often, canceling subscriptions, and changing your phone plan. It’s important to be purposeful about your spending to avoid impulse purchases or excessive online shopping. Also, consider consignment or gently used goods when you need to make a purchase; it helps your budget and keeps perfectly good items out of landfills.
Pay down debt
Debt consolidation is one way to ease your debt burden. By taking out a personal loan to pay off your high-rate debt, you may be able to get a lower, fixed interest rate and one easier monthly payment. Other ways to pay off debt faster include the debt snowball or debt avalanche methods. Both tactics involve making a list of your debts, finding extra money from your monthly budget, and focusing on paying off one debt at a time.
Build an emergency fund
When surprise expenses hit, an emergency fund can be a huge help or even save the day. After you have set up an account to put away money for your fund (preferably one that accrues interest and increases your investment), decide on a beginning savings goal — $1,000 is a good start. Add whatever your budget allows each month to your fund until you reach that goal. Then, increase your goal amounts over time to keep building your financial cushion. This can give you peace of mind because you have extra money available when you really need it.
Boost your credit score
Making sure your credit is in the best shape possible could help you down the road if you need to borrow funds to cover surprises. The better your credit, the better your chances of securing lower rates, higher amounts, and more favorable terms. You can get a free copy of your credit report from each of the major bureaus once a year at AnnualCreditReport.com.
Even with solid financial planning, most people need a personal loan from time to time. If you need to cover a surprise expense, make a major purchase or consolidate debt, visit your nearest Lendmark branch to talk with a loan expert or start your application online.