There is never a better time to adjust your budget than today. If you’ve been putting it off, you should know that building up your savings in case of a recession can save you a world of pain later.
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“Preparing your budget ahead of a potential recession is not just about cutting back on expenses, it’s about strategically reallocating resources to ensure long-term financial stability,” said Dennis Shirshikov, head of growth at GoSummer and finance professor at the City University of New York. Here are a eight steps that can be particularly effective.
Prioritize Building an Emergency Fund
According to experts, the first and most critical step is to focus on building or boosting your emergency fund. This should be your financial safety net, ideally covering six to 12 months of essential living expenses.
“During a recession, job security can become uncertain, and having a robust emergency fund can prevent you from resorting to high-interest debt or making hasty financial decisions,” said Shirshikov.
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Review Fixed Expenses
According to Lauryn Grayes, founder of Wealth Gems Financial, you should make it a point to review your fixed expenses like rent, utilities and insurance and see if you can negotiate lower rates.
“Even small reductions in essential costs can add up to big savings over time,” she said. “For example, at Wealth Gems Financial we were able to save over $25,000 per year by renegotiating our office lease and switching utility providers.”
Reevaluate and Reduce Discretionary Spending
Another key strategy is to take a hard look at your discretionary spending. This includes non-essential items such as dining out, subscriptions and luxury purchases.
“While it’s not about eliminating all enjoyment from your life, being more mindful of where your money goes can free up funds for more critical needs,” Shirshikov advised.
Dayten Rynsburger, CRO of Niche Capital CO, also recommended cutting out non-essential spending. “Look through your budgets for itemized expenses like going out for dinner, watching movies, subscriptions among others. The funds from this could be used to top up your savings.”
Automate as Much as You Can
Automate as many bills and savings contributions as possible. Grayes said setting up automatic transfers ensures crucial expenses are paid on time and money is regularly deposited into both short and long-term savings.
“At [my company], over 80% of our expenses and contributions are automated which provides financial security and stability.”
Pay Down High-Interest Debt
Reducing high-interest debt, such as credit card balances, should be another priority. “In a recession, the last thing you want is to carry the burden of expensive debt, which can quickly escalate if your income is disrupted,” said Shirshikov.
Paying down this debt not only frees up cashflow but also reduces the interest you’ll pay over time, allowing you to redirect those funds toward savings or investments.
Grayes advised the same by saying, “Pay off high-interest debts such as credit cards to avoid expensive interest charges.”
This means making extra repayments or consolidating balances to a lower-rate personal loan. “Eliminating revolving debt is one of the best ways to strengthen your financial position in uncertain times,” she added.
Diversify Income Streams
Consider ways to diversify your income. Relying on a single source of income can be risky, especially in uncertain economic times.
Shirshikov recommended exploring side hustles, freelance opportunities or passive income sources like rental properties or dividend-yielding investments. “Diversifying your income not only provides additional financial security but also opens up new opportunities for growth, even during a recession.”
Create New Income Streams
Grayes also recommended looking into ways for adding on new income streams through freelancing, consulting or driving for a ridesharing service. “Any extra money earned can go straight into an emergency fund. At my company, several employees have side gigs that generate over $500 per month in supplemental income.”
Rynsburger advised the same. “If you wish, you can look for another profession or carry out some freelance jobs, as this will lead to multiple streams of revenue for you.” He added that the additional cash can assist in savings and debt payment.
Review and Adjust Investments
According to Rynsburger, you should make it a point to check your investments portfolio again in order to determine whether it suits your risk capacity. “Especially now that the economy is uncertain. As a unique guide, you might want to consult a financial advisor too.”
All of these steps will ensure you’re better prepared to face a recession head-on if our economy falls into one.
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This article originally appeared on GOBankingRates.com: 8 Ways To Adjust Your Budget and Save Money Now in Case of a Recession
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
