How To Overcome A Recession
A recession is a period of temporary economic decline identified by a fall in GDP. In recessions, firms produce less, some go out of business, unemployment rises, average incomes fall, stock markets make less profit, and investment falls. Basically, anything that could go wrong in terms of an economy actually does go wrong. So, knowing how to spend your money during a recession and how to protect your finances would help you survive the next recession.
You must lead a frugal lifestyle in a recession
Leading a frugal lifestyle is probably the best strategy to avoid recessions. When you become able to live off a smaller amount of money, you will save more and won’t find it difficult to change your lifestyle when a recession hits. A frugal lifestyle is not a great burden; it’s all about using your sources astutely, spending wisely. If done properly, living frugally wouldn’t affect your lifestyle as much as you think. It would only impact some minimal aspects in your life, which wouldn’t account for a great difference. For example, making use of public transportation, spending less on groceries, and downgrading your cell phone plan would save you lots of money that you don’t know they even exist.
You NEED an emergency fund in a recession
In a recession, having an emergency fund is crucial in helping you get through your normal lifestyle. Many people don’t consider emergency savings, and thus fall in the seemingly endless cycle of debt and repay. A BMO survey released 56 per cent of Canadians have less than $10,000 as emergency funds; 44 per cent have under $5,000 saved. Other people turn to credit when money is tight. Another survey conducted by the Canadian Payroll Association found that almost fifty percent of workers are living paycheque-to-paycheque. These practices tend to extend tough times, increase debt, and, therefore, force you to downsize your lifestyle. Therefore, saving an emergency fund would help you greatly when the economy is down.
Diversifying your income and investments
Diversifying both your income and investments can really help. Relying on one source of income puts your financial status in jeopardy. Imagine that you are watering your garden and you only have one source of water. What would happen if water ran out? Your plants would wilt, and eventually die. The same applies to your financial status. If your sole source of income starts to dwindle, you would find yourself incapable of meeting your financial obligations and eventually result to borrowing. Therefore, having multiple sources would help you emerge from recessions back on your feet. In addition to your income, you should make sure that your investments are spread out across various industries, assets, and markets. One great way of assuring your investments are going to be diversified is investing in a Robo-advisor such as Wealthsimple. Wealthsimple will balance your portfolio automatically so you are making optimal returns in any sort of market. You can check out this great Wealthsimple review if you are interested in something like that.
To clear everything up, preparing in advance is the most effective method to recession-proof your finances. Although recession is beyond one’s control, you have the ultimate control on how you would face it, whether by turning to debt, or by saving a healthy emergency fund, familiarizing yourself with a frugal lifestyle, and having multiple sources of revenue—I bet the latter would be better. If you’re still looking for more information on recessions, check out this great article by the balance.