As the U.S. digs deeper into an economic recession due to COVID-19, it’s more important than ever to have financial savvy. While not all of us are fearful of job or monetary loss during these times, it’s no less important to adjust your strategy to deal with both the known and unknown risks involved in a recession.
There are so many complex and intertwined factors that impact the economy — local, national, and global. Because of this, it’s impossible to predict the future. Sure, we can see trends. We can look back on the past and glean wisdom. But ultimately, even the best of the best in economics won’t be able to tell you definitively what’s around the corner.
For all of us, no matter what industry we’re in, how we invest, or where we are, these money management strategies are essential for coming out of the recession on top.
4 Smart Ways to Manage Your Money During a Recession
1) Recognize the Overreactions
Humans are not always rational creatures. We can see that in everyday decision-making. We see it on social media. We see it in stock market statistics. When it comes to money, we don’t always make rational decisions, either. Stocks can fall not because a company has an inherent failing, but because an owner was seen doing something unsavory.
As we move through these uncharted waters, it’s vital that we gauge reactions and overreactions appropriately. Now more than ever, voices are competing to get your attention — and your money.
In the realm of real estate, I’ve warned against jumping in on “hot markets” or becoming a real estate investor when the getting is good. These aren’t inherently bad things, but if you’re just listening to the hype and the promises, you can fall into some bad financial pitfalls. It might not be an investment or a strategy that’s right for you and your individual circumstances.
I’m a proponent of considering the long-term,first and foremost. While we do take advantage of carefully weighed and vetted opportunities, our eyes are, ultimately, looking to long-term growth. We don’t get anxious when the market dips. We don’t worry about being ahead of the next big trend.
Instead, we stay the course with investments that are reliable and proven.
2) Make Room for Savings
During times of recession, savings and emergency funds are critical. They say that you should have at least six month’s salary in savings. The median savings fund in the United States is $7000 (the average? $30,000).
In this day and age, there are many things competing with our savings account:s recurring subscription expenses, high-interest loans, and the compulsion to live beyond our means. Too many Americans are living paycheck to paycheck rather than building lasting wealth. During these troubled economic times, it’s more important than ever to build that financial safety net.
You can start by paying off high-interest debts, such as outstanding credit card balances. This will free you up to save more each month. Examine your expenses and see what’s really necessary. Chances are, you can happily cut down on some things!
3) Stick to Good Wealth-Building Principles
In general, adhere to good wealth-building habits and principles. I know that sounds vague, but if you know what these principles are, you can handle anything the economy throws at you. There’s only so much we can control as individuals. You can’t control the economy. You can’t foresee financial hardships. All you can do is be prepared. And that starts with a solid understanding of good money management:
Don’t over-leverage
Live within your means
Pay down debts
Commit to a budget
Build up savings and emergency funds
Invest with the long-haul in mind
4) Diversify, Diversify
Portfolio diversification is one of the cornerstones of effective wealth building. And while that’s important, it’s not the only kind of diversification we can benefit from. Diversify your education. Diversify your skillset. While no one anticipates job loss, it can happen to any of us. Being up-to-date in your field of expertise, having a varied and valuable skill set, and generally continuing your education will help open up opportunities and ways to bounce back.
What are your top money management strategies going into the recession? Share in the comments.