The whole world is faced with an economic downturn due to the Covid-19 pandemic. The Global Financial Stability Report has seen a dramatic impact, prices of risk assets have fallen and credit spread have jumped. Although we still have much to learn about this pandemic, what we do know now is that it has gravely affected the world’s economy.
The World Bank forecasts that the global economy will shrink by 5.2% this year, making it the deepest recession since World War II. Not to mention, people are constantly hearing news of retrenchment and are living in fear of their well-being.
It is important to keep in mind that even though we cannot control the aftermath of a pandemic, or recession for that matter, we can control how we deal with it. Here are five ways you can save cost during an economic crisis and recession-proof your finances.
How to recession-proof your finances?
1. Pay up your debt
Debt does nothing but burdens you, especially during a recession when money is tight. Debts will add on to your stress and if you fail to pay up your debts, it will spiral out of control. The first thing you can do is to manage your budget—ask yourself where is the money coming in and where does it go?
Create some breathing room in your budget by paying off outstanding and high-cost debts. You also need to track down your debt and manage your finances around it. Now that you know how the pandemic can affect your life, you should pay off your obligations in order to get some peace of mind.
2. Create an emergency fund
An economic decline could mean that your job will be put in jeopardy and no job leads to no income. This is where an emergency fund comes in handy. It acts as a safety net for you until you get back on your feet.
You can try saving about 3 to 6 months’ worth of your salary so that when the time comes, you do not have to rely on your credit. It’s also important to note that creating an emergency fund doesn’t mean saving during a recession, instead, it should be prepared months or even years ago. The money that you have saved might just help you buy the day-to-day necessities until you have found another source of income.
3. Cut back your spending
During a recession, the best thing you can do for your pocket is to cut back your spendings. You can go through your monthly expenses, cut down the list of things that you don’t necessarily need and prioritise items that are necessary.
Living within your means can help you save more and ease your financial burden. If you have already familiarised yourself with minimal spending, adapting to a new lifestyle during a recession will not be as difficult. You can start small, such as cooking at home or scaling down your phone plan. The idea here is to save money and experts recommend spending no more than 30% of your net income on discretionary items.
4. Focus on the long run
During a pandemic such as this, we are uncertain of how long it will take until the economy recovers which is why it is crucial to focus on the long run. Your financial plan should take your long-term financial security into account. For starters, honing your skills and focusing on your education could help you survive in the future. These skills are seen as an investment because they might just help you with your employment, especially in a recession.
5. Have more than one income
Relying completely on only one income is risky because if the economy faces a downturn, you might risk losing your only source of income. Having more than one source of income helps ease your financial burden because if you lose one, you still have another option to look into. If you have the capacity to juggle between two or more jobs, feel free to stretch your wings and bring in the extra income.
Making ends meet during a pandemic is definitely a challenge for many. We don’t know how long this pandemic or recession will last. Having said that, if you care about your financial well-being and would like to future-proof your finances, the first step is to start saving now.
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