According to the International Monetary Fund (IMF), 2023 will be a challenging year for the world economy due to the unrelenting pandemic, climate change, the Russia-Ukraine war, and the increasing cost of living. At present, recession risks are increasing across several economies, and it’s expected to hit hundreds of millions across the globe. On the back of these circumstances, the IMF has cut down the growth forecast for 2023 to 2.7%. As per experts, the expected recession of 2023 will be one of the worst the world economy has seen in four decades.
Table of Contents
What is Recession?
A recession is a period of economic downturn, typically defined as a decline in GDP (gross domestic product) for two or more consecutive quarters. During a recession, businesses may experience decreased demand for their products or services, leading to layoffs, reduced profits, and other financial challenges. Consumers may also feel the impact of a recession through reduced income, increased unemployment, and a general sense of economic uncertainty. While recessions can be difficult for individuals and organizations, they are a normal part of the economic cycle and are often followed by periods of growth and expansion.
Indeed, it sounds scary, as recessions primarily bring various financial challenges. But if you take a few precautions, you can remain financially stable even during recessions and smartly use this opportunity to create wealth. Here are a few tips to stay sturdy during a downturn.
Follow a Budget:
No matter whether it’s a downturn or upturn, creating a budget and following it’ll help you identify where you’re spending more, as well as where a cut down is necessary. As your expenses and financial priorities may change every month, you need to revisit your budget regularly to manage it. These days several budget planner &expense tracker apps are readily available on the internet to make your task easier.
While making your monthly budget, you should understand your needs and wants. For instance, paying utility bills and buying groceries are your needs, while dining out and a weekend trip are your wants. Try to follow the 50/30/20 Rule of Budgeting. It’s a simple method that says to keep aside 50% of your monthly income for your needs, 30% for your wants and 20% for your savings. You can use a 50/30/20 budget calculator to see how this approach applies to your income.
If you follow a budget, you’ll soon find more money in your account at the end of every month. You can use this sum to save for the future or repay your debts. Never consider the budget a weapon to restrict you; instead, treat it as an option to take control of your expenses.
Build an emergency fund
Layoffs, pay cuts and recessions are close friends; usually, they travel together everywhere. Hence, you should prepare yourself to face these challenges in advance and building up an emergency fund is the first step in this preparation.
Ideally, your emergency fund should include your six months’ basic expenses. Now a question might have breezed into your mind; how can I know my basic monthly expenses? It’s pretty simple to find this. Write down all your expenses for a month on a sheet. Now cut down all your wants like expenses on entertainment, subscriptions, dining out, vacations, etc. Now, add the remaining, which will be your basic monthly expenses.
According to the latest Consumer Expenditure Survey from the U.S. Bureau of Labor Statistics (BLS), the average American household spends approximately $5,577 monthly. Hence, your emergency fund should be at least $33,500. Using a budgeting app will help you save more every month and reach this mark soon.
Use credit cards wisely
Limit the use of credit cards in emergency or unavoidable instances. Remember, the overall usage of your credit card should stay below 30% of the card’s limit.
Often, credit card companies come up with several offers to attract customers. Refrain from getting lured by these offers. Before going behind those offers, consider whether you’re really in need of that product or service.
Before making a purchase with your credit card, think about its repayment strategy. It’ll help you to repay the amount on time and reduce your debt burden. Also, regular checking of your credit card statement will allow you to keep track of your expenses.
Payoff all your high-interest debts
Eliminating those debts that cost you the most is very important. Data shows that most Americans carry credit card debt. And as per the latest consumer debt data from the Federal Reserve Bank of New York, Americans’ total credit card balance stood at $925 billion.
Typically, most credit card companies charge 18% or more interest on credit card debts. Credit card balance transfer is one of the best ways to reduce debt. It’s nothing but moving the outstanding amount of one credit card, usually with a high-interest rate, to another with a low-interest rate and abundant benefits.
If you’re a credit card holder, following the three steps below will help you manage your card wisely.
- Pay more than the minimum amount every month. It’ll reduce your interest expenses significantly.
- Use your bonuses and financial windfalls to pay off your high-interest debts.
- Choose the automatic route to make credit card bill payments. It ensures your bills are paid on time and will aid you in reducing your debt soon.
Maintain a diversified investment portfolio
Keeping your investment portfolio diversified will help you to grow your wealth during all financial seasons. Further diversification reduces potential risks and aids in keeping your capital safe.
Ideally, your portfolio should be a mix of equity and debt. Equities will help to grow your wealth, while debt instruments generate a regular income for you. And their proportion in your portfolio varies with your age. The following thumb rule will help you to simplify your asset allocation task.
Suppose your age is 30. Now, subtract your age from 100, i.e., 100-30=70. So, 70% of your portfolio should comprise of equity, and the remaining 30% should be in debt instruments such as bonds. As you grow old, your risk-taking ability will also reduce. Hence the portion of the equity in your portfolio also decreases with age.
Usually, during an economic downturn, share prices will start tumbling. Many get panicky at this point and start selling them at losses. Instead, it’s time to accumulate the shares of fundamentally strong companies as they will be available at a discounted price. If you find managing a portfolio of several stocks challenging, mutual funds are the best instrument for you. Additionally, investing in mutual funds is the best way to diversify your portfolio.
Staying financially fit is not limited to the recession period. You can practice these habits even during the upturn to remain financially secure and independent.