10 Tips on How to Manage Your Money in a Recession

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We are at the beginning of the most significant recession ever to hit the nation and the world. As mentioned in Episode 94 of Uncover Wealth Radio, it’s a deep U-shaped recession. The Coronavirus crisis has stripped us of our capacities to work and make money, and the global economy is taking the blow. Experts can only sit and wait, hesitant to make any optimistic predictions that might backfire. If anything’s for sure, it is that we need to gear up for the worst.  

So here are ten things you can do today and onwards to manage your money in a recession:

1. Have the Right Mindset.

Honestly, it’s all scary. It can be crippling to be constantly worrying about health, finances, and the future all at the same time. In our panic, we might make panic-based decisions that will do more harm than good. When we’re scared, we’re bound to make irrational choices. So if you’re in a state of fear and worry, don’t make any money moves, yet. Give yourself time to get out of that place of anxiety. Once you’re out, that’s when you can start making decisions.

What’s your financial status right now? Do you have an emergency fund? Is your business thriving right now, or is it headed for a crash? Is it at the brink of collapse? Or has it already collapsed? These questions should lead you to adopt a mindset that is appropriate for your current situation. Take an objective look at your case, and decide to take responsibility. The sooner you acknowledge that you’re the only one who can do something about your finances, the sooner you can take on wise decisions.

2. Keep your cash.

A recession is a state of uncertainty. Unless you have intensely studied the risks and potentials of investments you want to make, it is best to sit in cash. If you must, pull out stakes, so you have cash on hand – enough to give you some sense of safety.

3. If you still haven’t, build an emergency fund.

“One for your business, and one for your expenses”. Your emergency fund should be able to fund your expenses for at least six months. Prioritize this if you still haven’t, and when you have emergency funds for both your business and your personal life can you only focus your finances on investing in potential profit-earners.

Even if you are short on cash and your income is dwindling, you should still strive to put money regularly in your emergency fund. It can be intimidating to look at a tremendous amount of money that you have to save up, but again, the key here is the right mindset. You have to start with whatever amount of money you have. You’ll soon get used to the idea, you will be more committed to it, and before you know it, you already have emergency funds that will last you a whole recession. And then, define your “emergency”. It should be a situation where you don’t have any cash flowing into your bank account anymore for your basic needs, not one where you can’t afford luxuries you were so used to before all of this.

4. Focus on surviving.

As mentioned above, your emergency fund should be for when you have no more cash to spend on your food, rent, utility bills, and other necessities. The same goes for your current cash flow. Whether your business is thriving or not, now is not the time for luxuries and unnecessary purchases. Instil a sense of discipline in yourself to focus on spending only on what’s essential, both for your business and your personal life.

As a business owner, it’s best for your company and your employees to be conservative in spending money. Don’t worry about exceeding profit goals, and instead make your best effort in ensuring your company stays afloat. You already achieved much if you can do this in such a tough time as a global recession.

5. Revise your budget and stick to it.

Even with the right mindset, you might still find yourself losing cash faster than you expected. It isn’t enough that you have a feel of what’s happening to your finances. You might “feel” that you are not spending so much, when, in fact, your expenses are still higher than your current income or profit.

An objective look at your current cash flow will give you an unbiased approach for managing your finances. You may start by listing every expense for the month. At the end of the month, you will know how much you spent on every expense. From there, determine which expenses you can spend less on so that at the end of the month, you have some savings that can go into your emergency fund. For instance, if your takeout/delivery expense is £90 this month, you can then make a realistic budget of £70 for next month, so that you can put £20 into your savings.

6. Manage your debts.

Your budget should include debt repayment. Denying it attention will only cause you more stress in an already stressful situation. Your goal during a recession is to afford peace of mind, and paying off debt is very much part of it. No amount of meditation, Netflix binge-watching, or working can cover up the nagging existence of liability. You don’t have to aim for altogether paying off debt; you only need to make sure that you are making efforts to reduce it. Failing to do so will cost you ballooning interest rates that could have been cash for more worthwhile investments.

7. Take a side hustle

Without the need to commute, you now have more time at your expense. Make the most out of your extra time by taking on a side hustle. Doing this diversifies your income and recession-proofs your life. Just make sure that you don’t spread yourself too thin that you are not able to commit your best to both your main job or business and your new side hustle.

Your greatest asset right now is your brilliant mind and those extra hours that you currently have. These should go hand in hand. You should always be all-in when it comes to your side hustles. You’ll never know when they can turn into your main cash cow.

8. Invest wisely.

A recession is a great time for bargains. Only if you have an emergency fund in place and a steady stream of income should you consider investing. If you currently have both, then you are in a high position where you can confidently shop for low-priced investments.

Remember never to put all your eggs in one basket. Study the different options you have and distribute your investments wisely. For instance, if 20% of your current portfolio is in stocks, it might be wiser to leave only 5% in it, and allocate the other 15% in say, real estate. Make sure you don’t make blind decisions, though. Investment choices of today should be made at confident, calculated risks.

9. Distribute your cash in banks.

In the same way that your investments should be diverse, your cash should also be placed in different banks. Depending on your comfort, distribute your money in at least three banks. This way, if a bank crashes and uses up your money, you still have some in another bank. Now, this is very unlikely to happen. And if it does, the government would most likely bail out banks. However, there’s no harm in spreading your cash between banks. With online banking, there’s now zero hassle handling money in different banks.

10. Plan for the future.

This year’s recession is your preparation for the next big one. The lessons you learned this season are your armour and bullets for the upcoming season. Don’t beat yourself up for things you weren’t able to do in hindsight. Regret is counterproductive, and it consumes much of your mind. Today, however, there’s a lot you can do to ensure otherwise avoidable hardships won’t happen again in the future.

There’s wisdom in intentional planning. It’s something you can do for yourself, for your family, and your business. Instead of merely wishing for the best, work towards what is “best” in your terms. If you need to enlist the help of a professional for strategizing for your business finances, this is the best time to do so.

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Annette Ferguson

Annette Ferguson

Owner of Annette & Co. - Chartered Accountants & Certifed Profit First Professionals. Helping Online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.