The best ways to save money during a recession
As anyone who has been following the news over the last year would inevitably have noticed, the economy is not really doing so hot right now.
A vicious mixture of sluggish post-pandemic recovery, rising energy costs, spiraling rates of inflation and pressure at all points of the supply chain, combined to make 2022 one of the most difficult economic environments in decades. This led to rents hitting all-time highs, living costs spiraling, significant job losses in certain key sectors and stagnating wages.
These forces have combined to make millions of Americans feel acutely uneasy about what lies ahead in the coming year. For many of these individuals, it seems that a recession is all but an inevitability at this stage.
Many economists and CEOs feel similarly, and have gone on record that they expect a recession to be on the horizon for 2023.
But what exactly is a recession, and how can we financially prepare for it?
What is a recession?
Although the causes and consequences of a recession can be quite complex, the agreed upon definition is relatively simple! A recession is a significant, prolonged and widespread downward trend in economic activity. By most economic measures, two consecutive quarters of negative GDP growth are indicative that you are in a recession — although sometimes a more complex formula is used.
Economists will typically look at a range of different data to figure out whether a particular economy is in recession. This includes things such as non-farming payrolls, industrial production levels and retail sales, in addition to GDP growth.
In America, one frequently looked at metric to figure out when a recession is likely to hit, is the so-called ‘inverted yield curve.’ This is a chart that displays interest rates. When long-term interest rates are less than short-term interest rates, this indicates a shift in economic outlook indicative of a recession.
Recessions can be both long-term and short-term, with some countries experiencing recessions that have gone on for a decade or more!
Although the causes of recessions are not yet fully known — much like what causes inflation — we know that a combination of economic, financial, psychological and environmental factors all contribute. They can also be caused by monetary and fiscal policy shifts. Uncontrolled inflation can also contribute, given that it indicates a reduction in purchasing power and creates the potential for job losses.
With this understanding in mind, however, how can we protect ourselves financially during a recession? And is it possible to save money during one?
Protecting yourself during a recession
Although recessions can be incredibly difficult to endure given how widespread they tend to be, this doesn’t mean you will be completely unable to practice good financial habits during them. In fact, if you make careful plans, you might even be able to save some money!
- Reduce your spending: Although this is something you should always be trying to do, it is particularly important during a recession. There are many different ways of saving cash here and there, however, the most important thing to do is to track your spending. We recommend tracking your spending as accurately as possible and checking in on how you are doing every three weeks or so. Use this check-in to identify any problem areas or to spot opportunities to cut back on your spending.
- Get aggressive with high-interest debt: Another important step to take is to get serious about tackling any outstanding high-interest debt you have. Larger debts such as your mortgage or student loans tend to be at a fixed rate and should be tackled second to anything with a higher rate, such as a car loan or credit card. Be sure to pay off your interest debts as soon as possible to save yourself some cash in the long run.
- Identify investment opportunities: Although recessions are not generally thought to be good environments to invest in, you might be surprised! Economic downturns usually cause stock prices to fall, even for companies with a relatively strong long-term outlook. This makes recessions a good time to carefully choose investments in companies you think will experience growth once this recession subsides. This can both save you money and give you an opportunity to increase your portfolio in the long term.
- Assess your lifestyle: Another important money saving tip during a recession is to assess your lifestyle relative to your income and adjust accordingly. This goes beyond simply creating a budget and also involves identifying whether you spend excessively in any areas of your life. This might mean moving to a smaller place or selling that second car you barely use. It might also involve looking for ways to make some extra money!