Managing Your Personal Finances During a Recession

How to Manage Personal Finances During a Recession -- LEE LEGAL -- DC VA MD

Economists now agree that the American economy has entered a recession. Since March 2009, America has witnessed history’s longest bull market in which the S&P 500 rose 330 percent. Unfortunately, the party is over.

The deadly and highly contagious coronavirus has shut down our economy. Since March 2020, tens of thousands of Americans have died, and tens of millions of Americans have lost their jobs. With stay-home orders in place, America has put on its sweatpants. Recession is upon us.

How to Manage Personal Finances During a Recession -- LEE LEGAL -- DC VA MD

The woe is not limited to the United States. The International Monetary Fund says that the world economy in 2020 will suffer its worst year since the Great Depression of the 1930s. For the first time in our lifetimes, an actual depression is possible, but fortunately we’re not there yet.

There are steps you can take to prepare for economic hard times. Here’s how to manage your personal finances during a recession.

Assess your situation

First and foremost, gauge your circumstances. If you haven’t already done so, create a budget. Identify all potential strengths and weaknesses in your incoming revenue streams and outgoing expenditures. Gather together statements for all of your savings and investment accounts. Calculate your available credit, which are your credit limits minus your balances. Run your credit report now so you have a baseline by which to compare your efforts later. Keep all of this information together.

Preserve your income

Goldman Sachs expects unemployment to soar to 15 percent by mid-2020, while JPMorgan forecasts 20 percent. These figures are unprecedented in American history in both their depth and scope. During the Great Recession, the U.S. unemployment rate hit just 10 percent for one month in October 2010.

Become as invaluable as you can to your employer. Vulnerable targets during a downsizing are those employees who consistently take too much leave from work; who contribute the least; who have the highest salaries; and who lack the latest industry-specific skills. Compare yourself to your colleagues and see how you stack up. Do what you can to shore up your value to the organization.

That being said, most people do not remain with the same employer for their entire careers. Maintain and update your resume. Network with contacts and colleagues relentlessly. Upgrade your professional skill set through classes and research. Be open to learning new aspects of your industry, or even an entirely different industry.

While you are still employed, increase your take-home income by lowering retirement contributions or reducing tax deductions. Free up as much income as possible when times are tight. Consider taking on a side hustle if you have the free time.

Trim your expenses

Carefully and objectively scrutinize every budget line of your spending. You control where your money goes. Make some changes to see how it affects your bottom line. List your expenses in descending order from the most important to the least. Prioritize the necessities and prune the niceties. Cut the cord. Take a staycation. Keep your head down and pay your bills. Managing personal finances during a recession can be seen as a chore or as an opportunity.

Rethink your investments

If you are more than 10 years away from retirement age, sometimes the best course of action is to do nothing. Staying put is better than panicking, selling, and locking in short-term losses. Try not to monitor your investments too closely. Remember that investing for retirement is a long-term proposition. Look away until markets recover.

If you are 10 years or fewer away from retirement age, seek advice about shifting allocations to lower-risk investments. Typical short-term strategies involve fewer stocks and more bonds, which better weather prolonged market drops like those typical during recessions.

A rule of thumb for investing during a recession: Rebalance but don’t withdraw. Avoid overreacting to market declines during periods of unusual volatility. If you can, continue to invest during sustained stock market declines because that’s the essence of investing. You’re buying low now to sell high later.

Scrupulously save

Growing a savings account is important to maintaining your personal finances in a recession. Saving during tough times can seem difficult. Yet it’s not only possible; it’s essential. You will inevitably encounter a true emergency. You’ll need that cushion.

Unfortunately, during a recession, savings sufficient to cover three to six months of expenses (the normal rule of thumb) may simply not be enough. The ability to withstand protracted financial hardship often depends largely on whether or not you’ve saved enough. Try to boost your savings until you have between six and twelve months of expenses.

Saving requires discipline. Stick to your budget and don’t touch your savings unless you absolutely must.

Don’t count on help

In time of crisis, you must be your own best friend. Don’t expect to count on anyone else for help. Don’t count on the government or friends or even family. A recession impacts every facet of every institution, and no one fully escapes the ensuing economic ravage. Your plight is not unique.

No one knows how long this recession will last, or whether it will be short and shallow or long and deep. Don’t count on anyone for a bailout. You’re on your own. Look after yourself. Get up, make your bed, and get to work. Indulge neither ruthlessness nor apathy. Instead, practice and actively cultivate self-reliance.

Scramble but don’t panic

Your mental outlook is determinative to positive outcomes. Sometimes it can be easy to lose your focus on the future when you’re making decisions on the fly. Being forced to make tough choices rapidly doesn’t mean that those choices can’t be smart.

Is a mental health crisis looming? Maybe, but that doesn’t mean you need to become a statistic. Don’t lose your cool. Maintain an optimistic, realistic state of mind. Scramble if you must, but don’t panic. You must stay focused while adapting your personal finances to a recession economy.

Shed your debt

Minneapolis Federal Reserve President Neel Kashkari predicts the path to economic recovery from the coronavirus pandemic will be a long, hard road. If you are in excellent financial health and your income is secure, then you will be able to weather this recession.

On the other hand, if your income is variable (or nonexistent) and existing debt is your problem then consider filing bankruptcy can help you get a clean slate.

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About Brian V. Lee 565 Articles
Brian V. Lee provides bankruptcy, foreclosure defense, business turnaround, and litigation services to clients in the District of Columbia, Virginia, and Maryland. Brian was the Washington, D.C. state chair of the National Association of Consumer Bankruptcy Attorneys from 2016 to 2018.