For those who experienced the Great Recession of 2008, the word “recession” may terrify you. That’s understandable because the United States hadn’t seen a decline in economic activity to that degree since the Great Depression. However, there’s no reason to hit the panic button yet because there are various levels to a recession.
So, what is considered a recession?
An economic recession is when reduced financial activity occurs regularly over several months. Economists generally define a recession as a negative dip in the gross domestic product (GDP) for two consecutive quarters.
While many economists predict that this current recession shouldn’t reach 2008 levels, taking control of your money and preparing for the worst is still essential. Keep reading as we discuss how to save money during a recession and explore four ways to save money during an economic downturn.
4 Ways To Save Money During A Recession
Macro issues such as inflation, stock market dips and recessions are out of your control. Unfortunately, a lot of those issues are unavoidable and hard to predict. In times of economic uncertainties, it’s important to focus on the micro issues that you can control, like your personal finances.
Not sure how or where to begin? Here are our recommendations and tips for saving money during an economic recession.
1. Implement a budgeting system
During a recession, most Americans are generally strapped for cash, making the day-to-day expenses that much harder to cover. That’s why you must implement a budgeting system that works for you and your family during times of economic uncertainty. Establishing and adhering to a budgeting approach can help manage every dollar that is coming in and going out.
With numerous budgeting techniques available, it can be hard to determine which one is suitable for your current financial situation.
Here are some of the most common budgeting systems you can use to help keep track of your finances:
- The 50/30/20 Rule: This budgeting approach allocates your take-home pay into three categories—needs, wants and savings. 50% of your after-tax income should be assigned to expenses necessary for survival. That may include rent or mortgage payments, food, car payments, utilities, etc. 30% of your paycheck is dedicated to things you desire, such as hobbies, dining out, video streaming services, etc. Lastly, 20% should be put away into a savings account. You may want to adjust the percentages during a recession and spend more of your funds on the needs and savings category if possible.
- The Zero-Based Budget Rule: The zero-based budgeting rule is where your monthly income minus your expenses equals zero. That doesn’t mean your bank account should be $0, but after all expenses are accounted for, you should have nothing remaining.
- The Envelope Budgeting System: The envelope budgeting system is similar to the 50/30/20 rule, where the envelope is split into the same three categories of needs, wants and savings. The difference is there isn’t a percentage associated with a specific category. This approach allows for easier savings overall.
The good thing about these budgeting techniques is that they’re general approaches that can help you keep track of your finances. You can tailor each one to specifically fit your current financial situation.
2. Bolster your emergency fund
An emergency fund is a personal budget where you stow money away to cover any unexpected expense. If you haven’t created an emergency fund, getting one started as soon as possible is ideal because recessions tend to put your job security at risk.
While it may be more challenging with inflation reaching levels we haven’t seen in more than four decades, it’s recommended to have at least three to six months’ worth of expenses saved. In the event of sudden job loss, this rule of thumb can help you stay afloat until the cash flow returns.
Additionally, the three to six-month baseline should provide enough financial cushion, so you don’t have to turn to using credit or seeking out any high-interest loans.
3. Cut down on expenses where possible
One of the keys to making it through a recession is evaluating your current lifestyle and making necessary adjustments where you can. Unfortunately, the price of many products and services are up across the board. You’ll need to determine what expenses are considered absolutely necessary and which ones need to be cut for the time being.
For example, rent may be your most expensive expense. While you can’t completely eliminate that expense, you can certainly cut it down. You can let the lease expire and search for an apartment or home that’s more budget-friendly.
Some other places to cut expenses may include:
- Unused subscription services
- Unused memberships like a gym membership
- Reducing electricity use
- Reducing insurance premiums
- Cutting the cable bill and switching to a cheaper streaming service
- Switching cell phone plans
The positive part about recessions is that they don’t last forever. You may need to make short-term adjustments for long-term success.
4. Diversify your income
One of the biggest concerns Americans have during times of economic uncertainty is the fear of losing their job or their primary source of income. A June 2022 survey by Insight Global found that nearly 80% of American workers are concerned about their job security during the next recession.
While it may be difficult to predict job security, especially during a recession, it’s advantageous to formulate a backup plan to generate multiple flows of income. By diversifying your income, you provide flexibility in the event your main source of income gets stripped away.
Some assume that diversifying your income means you’ll need to find a second or third job. While taking on supplemental work is one tactic for creating additional cash flow, it’s not the only approach. Here are some creative ways to help produce an extra income stream:
- Side hustle: A side hustle is something you can do easily in your spare time. A few things to consider may include driving for Uber or one of the food delivery services like DoorDash, tutoring, childcare, selling crafts on Etsy, freelance writing, etc.
- Rent out space in your house: This would depend on your availability and comfortability, but if you have extra space in your home, you may want to consider renting out a room in your house to bring in some extra cash every month.
- Get into investment property: Depending on your local housing market, purchasing an investment property and renting it out is another great way to diversify your income.
Generating multiple income streams does not only shelter you in the event of losing your primary source of income, but it can also help you increase your savings and pay down debt.
Learn More About Money Management From Arizona Central Credit Union
Recessions can be a scary time with the prices increasing immensely and your job security at risk. The good news is that recessions don’t last forever. The economy will continue to increase and decrease. How you prepare for a recession will ultimately determine how successful you move through it. Following these tips will help you in times of economic uncertainty.
Do you want to learn more about money management? Check out some of our recent blog posts:
- How to Prepare Financially for Retirement: Building up to be financially stable in retirement takes decades to achieve. Discover some of the best strategies to implement into your retirement plan.
- 7 Budgeting Apps to Help You Manage Your Money: Budgeting is an important factor in achieving financial freedom. Discover seven of the best budgeting apps available on the market.
- How to Successfully Manage Multiple Credit Cards: Managing multiple credit cards can be difficult. Discover some of the best strategies to keep your credit cards organized.
