3 Financial Principles to Live By in a Bad Economy

Recessions have a way of drawing your focus to your money. This one, in particular, poses some unique challenges and that has led to unprecedented levels of government aid. But even then, many families are still struggling.

Everyone's situation is unique and so is each path to recovery. However, there are a few basic principles that should prove valuable during these challenging times. Here's a look at three of them. A bespectacled woman holding a pen close to her face as she's staring at a calculator on top of a notebook.

Image source: Getty Images.

1. Remain calm

Don't make any drastic decisions about your money, like sell off assets that aren't doing well or try to predict which stocks are going to do well amid the pandemic. There's always a small chance you could guess right and make a fortune, but there's a bigger chance that you'll get it wrong and cost yourself even more money.

If looking at your investment portfolio or retirement account causes you a lot of stress right now, step back from it for a while and trust that things will begin to rebound eventually. Remember that financial ups and downs happen and it won't be this way forever.

2. Stay diversified

Diversifying your investments can help you avoid substantial losses, and it's smart to do this whether the economy is good or bad. Make sure you spread your money out between multiple investments. Mutual funds, including index funds, are a great way to do this because they contain dozens of investments you purchase as a bundle. Exchange-traded funds (ETFs) also provide instant diversification. You must make sure you spread your money out between different sectors, too, so if one is hit especially hard, you have investments in other areas that can pick up the slack.

Staying diversified is also good advice when it comes to your income sources. You probably have a regular job that provides the bulk of your income, but it doesn't hurt to have other revenue streams to fall back on in case you're unable to work. If you don't already have additional sources of money, now is a good time to start.

There are plenty of opportunities to earn extra income these days, and many of them, like virtual assisting, you can do entirely online. A lot of side hustles also give you the flexibility to decide when you'd like to work, and some require little to no long-term commitment at all. You can rent out a spare property or a parking space you're not using. Or you could create an e-book or an online course on a topic that can earn you profits even while you're sleeping.

3. Live within your means

Living within your means reduces your household expenses and it can free up additional cash you can put toward an emergency fund and your other financial goals. Living below your means is even better, if you can, especially now when the next few months are likely still going to be difficult financially for a lot of people.

Review your budget and look for areas where you can reduce spending. Comb through old bank and credit card statements looking for subscriptions you may have forgotten about and cancel the ones you're not using. You should also look for ways to reduce the cost of essential purchases, like using coupons when you buy groceries. Consider holding off on nonessential purchases until you feel more secure about your finances again.

Your current financial situation may be stressful, but you just have to take things one day at a time. Make changes to your budget and your investments if you must, but make sure you think through all of those choices carefully and don't allow yourself to make rash decisions based on recent events.

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