Part of recession-proofing your finances is adjusting your budget. Budgets are an essential cornerstone of effective money management in times of economic security and uncertainty alike. You can better understand and track how much money is coming in, how much is being spent, and where exactly it is going by following a budget.
If you’re already on a budget, here are easy-to-follow best practices to prepare for a potential recession.
Read more: 9 bills you should never put on autopay
See also: How to get rich with a regular job
Build an emergency fund
There’s a reason the emergency fund is often at the top of lists as an important financial strategy. In the event of a catastrophic financial emergency, such as For example, a sudden job loss, you can use money saved in an emergency fund to weather the storm. Those who don’t have emergency funds may rely on loans or high-yield credit cards or resort to retirement savings to stay afloat financially during tough times.
The general advice is that an emergency fund should be able to cover three to six months of living expenses. In times of inflation, it is better to err on the side of six months, if not a little longer. Store an emergency fund in a liquid investment vehicle, like a money market account or high-yield savings account that you can access easily.
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Budget one day at a time
Most people know how to budget, track expenses, and set financial goals. However, one of the most difficult aspects of budgeting is sticking to it on a day-to-day basis. Individuals who have repeatedly had to adjust their budgets — due to inflation, student loan payment schedules, and a possible recession — may feel overwhelmed at the idea of making another round of financial adjustments.
What can help is setting up a budgeting system that focuses on one day at a time. Kasasa CEO Gabe Krajicek said you should start by taking your total monthly income and subtracting your usual bills and savings goals. The remainder is your discretionary income.
Example: You bring home $5,000 a month after taxes. You have $2,000 in bills and your goal is to save $1,000 a month. That leaves you with $2,000 for voluntary expenses that can help cover variable expenses like groceries and gas. You would take your discretionary income and divide it by 30. This amount is your daily budget.
“Run a rolling total of how much you’re over or under each day so you can move your daily budget every morning,” Krajicek said.
In this example, your daily budget would be €67 on the first of the month. Let’s say you spent $70 on the first of the month. Your daily budget for the second day of the month would be $64.
By focusing on one day at a time, Krajicek said, you can narrow your outlook and make budgeting more palatable.
Choose a budgeting method that works for you
You may be able to set your budget by focusing on one day at a time, or you may prefer a different method, perhaps the 50/30/20 system or a budget where you pay yourself first.
Whichever method you prefer, Tanya Peterson, consumer finance expert and vice president of Freedom Financial Network, recommends budgeting in the way that works best for you and your needs. Remember to use a designated tracking method — a spreadsheet, physical notebook, or dedicated budgeting app — to make budgeting a best practice.
Think of money as a tool
In times of economic uncertainty, it’s easy to put personal financial pursuits on hold in order to save as much money as possible to get through the difficult period. Instead of spending every waking moment focusing on dollars and cents, Krajicek recommends remembering the reason behind the action.
“Savings give you the freedom to choose instead of feeling stuck in a situation because you depend on a paycheck,” Krajicek said. “Think of your savings as your personal financial safety net over which only you have control. (it) allows you to live your life on your own terms.”
While there’s plenty of advice out there on how to save money and slash monthly bills, Krajicek recommends treating money as a tool. You can find motivation to save by focusing on the “why” of an action, not just the “how.”
When budgeting, Krajicek said, figure out what’s most important to you. Make decisions based on your non-negotiables. For example, if exercise is important to you, you can switch to a gym that has a cheaper membership. If you enjoy using streaming services for entertainment, keep your subscription to one streaming platform instead of two or three.
The more diligently you track your spending, the sooner you can achieve a certain level of financial security. Then, when unforeseen circumstances arise, you can take calculated risks and have peace of mind.
When a budget becomes a spending plan
Over time, a careful budget that sees money as a tool will evolve into a spending plan that will help you do and have the things you want in life. Peterson recommends writing down the important goals you have for the future – e.g. For example, sending a child to college or retiring — and developing a budget to meet those goals.
“The idea is that you review and change those goals and your budget month-by-month, year-by-year, for a lifetime — recession or not,” Peterson said. “If you adopt this mindset and habit as best practice, you will set yourself up for much greater financial stability and success.”
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