5 Money Moves to Recession Proof Your Finances
With inflation at a skyrocketing rate and the central bank of Canada increasing its interest rates, one of the biggest questions everyone has in their heads for the Canadian economy is this: “Is a recession really coming? And how likely is it?.
Recovering from the Covid-19 pandemic and the resulting loss of business has been hard for many Canadians, and the looming recession is not making things any easier. Inflation rates are affecting every single market.
But what if we told you that recession is something that you can prepare for and even battle with wise financial decisions when the time comes?
Let us look at what a recession is and how you can save money even during an economic downturn.
What is A Recession?
A recession is a significant, widespread, and prolonged downturn in economic activity. A good rule of thumb is that a recession occurs when there are two consecutive quarters of decline in the gross domestic product of a country.
As the government has been hiking interest rates to curb the rising prices everywhere. Just this year in June we saw a four-decade high of 8.1% interest rate.
Many economists are now warning that a “mild recession” in 2023 might be necessary to avoid this inflation spiraling out of control.
Mild Recession Vs. Great Recession
There are various shades of a recession – it can range from mild gray to dark black! The idea is that this coming recession won’t be that damaging and we would be able to recover fairly quickly. This would be called a growth recession.
A growth recession happens when the economy is so weak that the unemployment rate climbs by 1% over a couple of years.
Another way of determining the type of recession is to see the duration. Is the GDP decline just for a couple of quarters or spread over a number of quarters?
Conversely, we have a great recession. This is when the economy contracts pretty significantly, for example – 4 to 5% over many quarters. The unemployment rate can also be seen rising more than 3% during these times.
Rather than making this a cause for alarm, one should see this news as a way to prepare for the future.
Here are some important tips that can help you be financially secure even during a recession:
Money Saving Tips to help you Survive A Recession
Tip #1: Build Your Emergency Fund
The economy going down can have adverse effects on your personal and work life. Losing jobs or pay cuts are all a possibility that one must prepare for. This is why having an emergency fund helps you prepare for a recession.
An emergency fund is the safety net that gets you through a financial crisis and makes sure you get back on your feet once the hard times end.
If it is possible, you should save around 3-6 months’ worth of your wages, this is so that you don’t have to dip into your credit.
Using your line of credit as a safety net is the worth thing one can do during recessions and can haunt you for years to come.
You need to consider the fact that in the future you would need a larger income than you currently have to pay off your credit debts.
Tip #2: Pay Off Yout Debts
Carrying debt is like carrying a massive burden. If this burden gets heavier, especially during recession times, it can lead to a large amount of stress.
The longer you hold your debt, the more interest you pay which can soon get out of hand when you are in a financial crisis.
Now is the time to take stock of your financial situation and all your payment obligations.
To do this systematically, you should first assess the amount of money coming into your household and establish an accurate budget.
Having a budget identifies the spending areas where you can afford to cut back while focusing on the areas where money really needs to be spent.
Tip #3: Downsize to a more Frugal Lifestyle
Downsizing and learning how to live on fewer things and incorporating a minimalist lifestyle is a great strategy to get through the recession.
When you live with less and learn to cut back where you can, you end up saving much more money and won’t find yourself struggling to maintain a lavish lifestyle when a recession hits.
In fact, there’s been a shift in people’s mindsets and many are preferring to live a minimal lifestyle.
In fact, living frugally does not mean you have to give up the fun and the things you love the most.
Rather, it means that you make a conscious effort to reduce expenses with minimal impact on your lifestyle.
You can start living frugally by making simple lifestyle changes to your day-to-day routine. Spending less on groceries and scaling down your cellphone plans. Or even using public transit when you can and saving on the fuel costs for your car.
Tip #4: Diversify Your Income
You must have heard of the phrase – “do not put all your eggs in one basket!” Because if that one basket falls, all your plans are gone.
Similarly, relying only on a particular job for all your income has a lot of risks because if the economy goes down, you could lose your job and along with that, your only source of income.
Having multiple streams of income can really help you out if your day job is threatened due to financial crises.
One way of doing this is by starting your freelance portfolio and taking on work that can help add up to your sources of income.
If you’re living in your household with a spouse and your spouse works in a different industry, that right there is another way of diversification.
Even if the economic downturn brings down your industry, at least your spouse can have some stability and help both of you out.
A new and popular way of adding to your passive income is by converting your spare home or even part of your own home into an Airbnb.
At ipresalecondos.com, we have in-house property managers that help you from the start to the end by helping you set up and operate your Airbnb adding to your passive income.
Tip #4: Diversify Your Investments
Along with diversifying your income, one must also look at diversifying your investments as well.
Having all your investments tied to the stock market could spell disaster for you if the stock market goes down. A good thing to do is go through your investment portfolio and do an audit to see what industries and which kind of investments you are tied into.
Some different industries that you can diversify your investments in are:
Real Estate – A pre-construction condo is one of the best investments one can do and it generally appreciates with time.
Apart from investing in stocks and bonds, you should also look at international investments. Diversifying in different countries can help reduce your risks in the event of an economic downturn.
To Recap… Prepare in Advance!
Financial crises can be really scary IF you enter them unaware and under-prepared. But if you know that a storm is coming, you can fortify your finances so that you get through it unscathed.
Creating a contingency fund, adopting a more frugal life, and diversifying your income and investments are all smart ways to fortify yourself and prepare for the recession.
With these tips, you can at least rest assured that even though the world is going through a financial crisis, your finances are under your control – like they always should be!
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To that end, we’re constantly working on improving accessibility to the latest presale projects in the city of Surrey, Vancouver, Burnaby, Richmond, Port Coquitlam, New Westminster, and the rest of the lower mainland.
If you want to learn more about what kind of market we are in currently and how to get the most out of it, get in touch with Ravi Bhindi, who has 18+ years of experience in real estate and pre-sale condos. Please call or text at 604-825-8881 or email at email@example.com