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Budgeting Tips to Help You Financially Prepare for a Recession

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Do you know where all your money goes each month? Do you have a savings plan in place? What about an emergency fund? How confident are you about your discipline for managing a budget?

While the US economy appears to be performing well now, many are concerned we’re either about to enter a recession or already have. Most people were caught off guard by the brief recession in 2020. Here is how to prepare now so that you’re ready for what comes.

What is a Recession?

That’s not an easy answer, but generally, a recession is defined as a significant, widespread, and prolonged downturn in economic activity. That’s why it’s common to declare a recession whenever the economy contracts for two quarters in a row. A recessionary economy will likely see job losses, higher interest rates, cautionary lending, and higher prices for food, gas, and housing. Loans are harder to obtain and often cost more.

While many experts are divided about whether or not the economy is in a recession or headed towards one, it’s important to remember that an economic downturn will eventually happen. The prices for gas, food, and housing are already straining many households, making managing a budget more important than ever. If you want to prepare yourself to be a good budget manager, we’re here to help you. Remember, anyone can be a good budget manager with a bit of knowledge and discipline.

Planning a budget

It is essential that your household has an emergency fund saved away. Ideally, this is six months’ worth of expenses. If it’s achievable, you may want to try for an entire year’s worth. This will insulate you from any job loss, pay cuts, or price increases that may come your way.

So, how do you get your emergency fund up and running or add to it? If you don’t already, it’s important to begin planning a budget. Managing a budget is the first step to financial security. Begin with a list of all your mandatory expenses (rent or house payments, utilities, etc.). Then it’s a good idea to make a list of the things you could stop spending money on (eating out at restaurants, streaming subscriptions, etc.). Next, decide how much money you want to or think you should save each month. If you’re not already there, begin to consider what items you could eliminate from your budget. Still not there? That’s okay. Planning and managing a budget is more important than getting to the perfect number each month.

Once you’ve accrued your ideal emergency fund, it’s a good idea to begin paying down certain debts you may have. Credit cards should be your number-one priority. Right now, interest rates are rising and will continue to rise. Most credit cards have a variable interest rate, and the average rate on credit card debt could easily rise to 25% by 2023 (*Tip: Credit Union credit card interest rates are typically lower and are capped at 18% unlike bank and retail credit cards). When planning a budget, be sure to find room to pay down high interest or variable interest debt.

There’s another consideration in planning a budget: lifestyle creep. Over the last decade, consumers have grown accustomed to low-interest rates. Since 2020, wages have been rising, and federal student loan payments have been paused. Throw stimulus payments in the mix, and many households are likely living beyond their means.

Being a good budget manager means being realistic about your spending and thinking hard about needs versus wants. Some common ways to curtail spending include eating out less, auditing your automatic monthly payments, and refinancing high-interest debt. For example, one study showed that consumers underestimated the amount they spent on automatically renewed subscriptions (think Netflix or Grubhub+) by $133 a month. That’s some serious change. Being an effective budget manager means educating yourself on your spending habits.

Managing a budget doesn’t have to be complicated. It requires a little discipline and some realistic expectations based on your income and overall situation. Don’t worry too much if you aren’t saving as much as you want now. Many experts agree that developing the habit of saving is more critical than the amount you save. Follow these tips, educate yourself, and be a disciplined budget manager for your household.

Professional Guidance in All Financial Climates

In both times of calm and economic uncertainty, you want to work with financial professionals who are on your side. The experts at Power Financial Credit Union are ready to guide you through whatever the future brings. If you are ready to become a member, you can join Power Financial Credit Union. We are here to guide our members and help you do more with your money. We have almost 35,000 satisfied members and have proudly served the community of South Florida for over 70 years.

If you’re already a member, consider Power Financial Credit Union for all your financial needs. We can offer personal loans to refinance higher interest debt, home equity loans for a variety of reasons, and a wide array of investment planning advice. Visit us today.