Budgeting For A Recession

By Eric Fontinelle | September 06, 2011 AAA
Budgeting For A Recession

In a recession, the key to running your finances is to be conservative and to manage risk. This means increasing cash, diversifying income and investments, and decreasing or avoiding liabilities. (For more, check out 5 Lessons From The Recession.)

TUTORIAL: Budgeting Basics

Take on a Side Business
Probably one of the best things you can do in a recession is to try taking on a side gig. A side business brings in some extra cash which you can add to savings, or can help supplement unemployment if you lose your main job, making your existing savings last longer.

In some states, part-time or occasional work either does not reduce unemployment benefits or only partially offsets benefits, so long as you continue to pursue full-time work. Plus a side gig has other intangible benefits.

A side gig keeps you actively working even if you are laid off, which can do wonders for your morale during the job search. It may even help you find another job faster, since even unrelated work often looks better on a resume than having an ever-lengthening gap in employment.

Increase Your Cash Savings
In a recession, cash is king. For personal finance, this means making sure you have enough set aside for an emergency fund in case you get laid off from your job.

A good rule of thumb for an emergency fund is to have enough saved that you can live off of it for as long as you expect it will take you to find another job or source of income. Often you hear of three to six months, but if you are in an industry where jobs are scarce, you may want to save more so that you are prepared for the possibility of a longer job search. (To learn more about holding cash, see Stashing Your Cash: Mattress Or Market?)

Check Your Investment Portfolio
When the economy is expanding, often stocks can increase in value quickly. If you're not checking on it frequently, it's easy for your portfolio to become overweight on equities.

At the first signs that economic growth is lessening, it may be a good time to rebalance to your long-term portfolio allocations. Then if volatility picks up in financial markets, as it often does in a recession, you'll be facing the price swings with the portfolio allocations that are appropriate for you.

Decrease Credit Card Debt
The last thing you want in a recession to have is a lot of high interest credit card debt dragging on your finances. Now is a good time to pay down that debt, and look for ways to lower the interest you are paying.

There are many tricks you can use to reduce the interest you are paying. The simplest is just to call and ask for a rate decrease. There are plenty of credit cards out there that you could transfer your balance to if they won't budge. Often just asking can get the rate reduced by a few points. Don't expect huge rate decreases, but even a small change is worth the small amount of time that it takes to ask.

Sort Your Needs From Your Wants
Chances are that in a recession you won't get much warning if you are to be laid off, so it's best to have a plan in place beforehand. One of the best steps to take is to set up a "what if" budget that separates your needs from yours wants. This makes it easier to target areas where you could quickly cut back expenses if you need to.

Defer Large Purchases
Unless you feel 100% secure in your finances, it is often best to wait on large purchases like cars or houses when the economy is shaky. Adding monthly payments or depleting your cash reserves is something you never want to do when there is uncertainty that you will keep income coming in.

Start Paying in Cash
Studies show that people often spend less when paying in cash, rather than using credit or debit cards. If you find this works for you, it could be a great way to save a little more money without feeling the pinch.

The main disadvantage of cash is that it is harder to track where you spend your money, since you can't just look at an online statement. To overcome this, it may be helpful to implement an envelope budgeting system.

The Bottom Line
A recession can be tough on your finances, especially if you suffer a lay off. But by planning ahead you can increase your financial resiliency and minimize the impact of a recession on your life. (To help you survive a recession, check out 5 Things You Shouldn't Do During A Recession.)

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