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As a child of the Great Recession, economic downturns aren’t new to me. While it’s a natural part of our economy, we aren't taught how to save during a recession in school.
Recessions wreak havoc not just on our economic system, but our personal finances. Your job is almost always on the line and, meanwhile, bills for food and rent keep piling up.
It’s not a great spot to be in, for sure.
While frugality won’t solve the world’s problems, a healthy dose of frugal living can make a recession bearable.
Frugality is awesome because you not only save money, but make do with what you have. It’s the ultimate exercise in mindfulness and penny pinching—two of my favorite things.
How Is The Market Affected By A Recession?
Simply put, when something suddenly affects the world, like a pandemic, or a war, then the markets are going to be adversely affected.
For example, when Russia attacked Ukraine, we saw how gas prices soared worldwide — reaching a record-high $4.173 per gallon.
In the same manner, US inflation is expected to be higher, and grain prices globally will rise too since Russia and Ukraine are major exporters.
Another example in recent years is the ongoing COVID-19 pandemic. Its start in early 2020 was the cause for Wall Street to slide into a bear market after being in a bull market for 11 straight years.
And just over a decade earlier, the Swine Flu cost the global economy over $360 billion, despite lasting roughly 12 months.
But what exactly happens when the economy goes down? Where does the money go?
Well, here’s how the economy suffers:
- Higher unemployment
- Lower wages
- Increased prices
- Stock market crash
- Disrupted supply chains
Higher unemployment and lower wages mean weaker financial power.
In other words, people will struggle to pay bills, let alone spend money on non-essential stuff or pleasure which is what ultimately drives the economy.
Consequently, with less money circulating in the economy the stock market takes a hit — companies struggling to meet financial expectations and investors selling off stocks.
It’s practically a domino effect — everyone struggles: ordinary people, small businesses, big corporations.
Therefore, it’s important to make sure that you’re financially secured in case any natural or man-made disaster happens and the economy takes the blow.
7 Tips On How To Save During A Recession
According to a LendingClub report, as of December 2021, roughly 61% of U.S. adults live paycheck to paycheck.
Additionally, 56% do not have enough to cover a $1,000 emergency.
That means that if the majority of people are out of work for even a couple of weeks, they most probably won’t have enough money to pay their bills.
But perhaps they haven’t found the Ultimate Guide to Savings yet. Jokes aside, when it comes to protecting your money from an economic collapse it’s not just about savings.
It takes growing healthy financial habits, having a budget, and investments besides the savings.
With this in mind, here are a few steps to protect your finances when the next economic crisis strikes:
1. Save Strategically
We don’t want you to save your money forever. Because, as we’ve repeated many times before, saving after a certain point becomes losing. But what you should aim for is:
- Save enough money to cover six months worth of expenses
- Have additional $2,000 for unaccounted emergency expenses
This way, if you lose your job, you’ll still be able to pay your bills while on the lookout for a new job.
And finding a job can prove difficult in peaceful times, let alone during an economic crisis when the demand for labor drops.
2. Pay Off Your Debts
Being debt-free is imperative to your livelihood during an economic disaster. You don’t want to end up with your student loans eating away your savings fund.
So pay off your student loan debt, settle your credit card debt or any type of debt you’re carrying and fortify your finances to withstand any blow.
3. Hold Liquid Assets
Holding liquid assets in tough times is of utmost importance. You want to have easy and quick access to cash.
Make sure you have easy access to your savings accounts — this especially matters if your savings are in an online bank rather than a traditional one.
Cash is king during an economic crisis.
4. Diversify Your Portfolio
Economic disasters are usually almost always accompanied by a bear market. So to protect your investments you need to diversify your portfolio.
You may have a soft spot for individual stocks or mutual funds but there are so many investment opportunities out there: real estate, cryptocurrency, life insurance…
Don’t wait or you may regret not diversifying your investments when the trouble comes.
5. Cut Your Spending
We’re not saying that you should only spend money on bills and food. But cutting unnecessary expenses is something every financially apt human should do, no matter their income.
Go through your utility bills, insurances, and subscriptions to identify opportunities.
Maybe you can switch operators for less money, cancel cable TV that no one’s watching, bundle up your insurances to get discounts.
It takes some work, but it pays off in the long run as more money stays in your pocket.
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6. Watch Market Trends
Pay attention to trends and behavior, especially in the investing community. Industries struggle for a reason, so be careful which stocks you choose to invest in.
For example, real estate and auto companies were the hardest hit after the 2008 crash. On the other hand, they were also the most profitable for investors who bought them when they were low.
7. Avoid Media Madness Before (And During) A Recession
Including the internet. Or better yet, especially the internet. False information spread with the speed of a click. The mass media is in the business of selling emotions.
It’s all about sensationalism. Don’t get caught up in all of the hype, educate yourself from multiple reliable sources, compare information, and stick to your financial plan. Panic won’t help.
How To Save During A Recession – The Bottom Line
There’s no sugar-coating it: recessions suck. They really do. When everyone’s going through hard times, it can feel like there’s no end in sight.
Frugality won’t solve the recession, but these frugal approaches will help you save during a recession and get a better handle on your money during an economic downturn.
Prepare for the worst, but hope for the best. Live frugally so the recession doesn’t capsize your finances.
