How to Prepare Your Family Finances for a Recession
The best time to plant a tree was yesterday. The second best time is today.
The talking heads on TV are putting fear into our heads and hearts with the word “recession”. While I think we always have to be weary of the talking heads, it’s important that we start planning for an uncertain future and the best time to plan for an uncertain future is when the going is good. The thing with fear is that it paralyzes most of us from taking any action. Fear never goes away. We are wired to fear because it keeps us safe. While we sometimes think humans are complex creatures, our inner core and need is to ensure we survive from whatever could hurt us. The challenge is that wherever we turn, we are made to fear anything and everything because fear is used to sell us things. Instead of letting fear get to us, let’s put a plan in place that we know we can easily execute to get our finances in order before the economic slowdown happens for the sake of our future selves and our families.
Emergency Fund
The emergency fund is the #1 area I would recommend to fill up in the next few weeks or months. Just like in nature, it’s best to store up when the harvest is good, not when it’s already gone. There’s a reason animals collect and forage right before the winter. Winter always comes. We just don’t know how bad it can be and it’s always best to prepare for the worst.
I like to call my Emergency Fund Planned Savings. Using a tool like CapitalOne or Ally Bank, create separate multiple savings account for the items that you will most likely need: Housing, Car, Food, Health, etc. Compartmentalizing your savings can give you a psychological boost knowing that should anything happen your housing costs are covered for an X number of months. The goal of the Planned Savings is to ensure you have enough cash flow to cover all important needs. Cash flow is critical here. Using credit as an emergency fund, while doable, can put you in a financial spiral pretty quickly. It’s good to have, but don’t plan on using it. With Planned Savings, you want something that you can absolutely count on with certainty. Planned Savings is buying peace of mind and that’s what money should provide for you.
Ways to Find Extra Cash for Your Emergency Fund
Sell Stuff
Return items with tags still on them
Pause subscription services
Learn how to DIY - hair, nails, home decor
Shop secondhand
Network, Network, Network
Even if you think your job is “safe” from the recession, plan accordingly. When business owners begin to feel fear because sales are down their first reaction will be to tighten the belts and an easy way to do that is to reduce staff. Again, this is a reaction out of fear because they are also are worried about their own survival. Networking can ensure you keep ahead of what’s going on in your industry and keeps you top of mind in case you do need to find a new role.
Networking can be as simple as sending a quick email to say hello or congrats to an old colleague or boss. Networking can be as simple as heading out for coffee or a beer. In fact, I would encourage you to schedule at least one lunch a week or even coffee every week this year with someone from your network. This can be a great way to stay in touch and have a productive lunch or coffee break.
While this advice is good for those working, I believe this advice is also good for stay-at-home parents. Why? Because should a recession come and should you need to step up to secure a job to help the family finances, it’ll be easier if you already have some contacts to reach out. Yes, I know this takes a bit of work, especially with kids in the picture, but remember some of the parents you see each day at daycare, at the park or anywhere else could open a door to an opportunity. Stay open minded.
Optimize Expenses
I think a lot of people get the order of when to optimize expenses wrong. It’s not when the going gets tough, but when everything is going well. I recommend reviewing your expense for the last 3 months and looking to see where your tops costs are. Chances are its in the following categories: housing, transportation, and food. These areas should be as optimized as possible because these are most likely the areas that you cannot cut down on. The other categories like dining out, entertainment, clothing, etc. will be easy to cut if the need arises, but it’s harder to lower your monthly mortgage or your food budget if you’ve got a family to feed.
Don’t be afraid to buck the trend a bit when it comes to optimizing your expenses. You may not have the newest car on the block, but if it’s completely paid off, then it’s one less thing you have to worry about. Still have a Planned Savings account for the maintenance that comes up, but at least you won’t have to worry about monthly payments.
Continue to Invest
When a recession or slowdown hits, many people automatically pull money out of investing because they fear of the market continuing to go down. This is actually counter intuitive because it is during this slowdown that many things, specifically stocks and funds are on sale. Remember that the time to get a deal is when everything has dropped in price so you can capitalize when it goes back up again. This may take some time, but if you are fairly young, then your investment horizon will be in decades, plenty of time to take advantage. As Warren Buffet is quoted to have said “Be fearful when others are greedy. Be greedy when others are fearful.”
Continue to allocate money towards investing. In fact, keep your automatic withdrawals in place so that you don’t even consider that money as part of your spending or planned savings. Let the power of dollar-cost averaging, which is a technique that invests a fixed amount of money into a stock or fund at regular intervals, build your investment value.
Focus On The People That Matter
Lastly, advice that doesn’t seem like it would fit here, but one that will be crucial in the next few months to come. Focus on the people that matter to you. Check in with your parents. Check in with your sons and daughters. Check in with your long distance friends.
It’s sometimes very easy to get caught up in the bad news. Bad news is bad news. Some of it will continue to paralyze us from doing anything or from seeing opportunities. Focus on the people around you. Focus on what their needs are and how you can continue to care for them. An economic recession is not the end of the world. In fact an economic slowdown is sometimes what’s needed to keep things in balance.
If you need help on what else to do before the recession hits, consider The Money Journal. It’s a guide to help you understand your feelings about money and how to make money work for you.
If you think this content could help someone, even just to spark an idea, it’s your duty to share it using the links below.
How to Prepare Your Family Finances for a Recession
