A Possible Recession in 2023 Means You Need To Do These Things for Your Budget
Part of recession-proofing your finances involves adjusting your budget. Budgets, in times of economic certainty and uncertainty alike, are an essential cornerstone of effective money management. You can better understand and keep track of how much money is coming in, how much is going out and exactly where it is going by following a budget. If you already adhere to a budget, here are easy-to-follow best practices for preparing for a possible recession.
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Build an Emergency Fund
There’s a reason the emergency fund is often at the top of the list as a key financial strategy. In the event of a catastrophic financial emergency, such as sudden job loss, you may use money saved in an emergency fund to help weather the storm. Those without emergency funds may find they rely on loans or high-interest credit cards or they resort to liquidating retirement assets to stay financially afloat during tough times.
The general advice is that an emergency fund should be able to cover three to six months’ worth of living expenses. In times of inflation, it is better to err on the side of six months, if not a slightly longer. Store an emergency fund in a liquid investment vehicle, like a money market account or a high-yield savings account that you may easily access.
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Budget One Day at a Time
Most people have an understanding of how to create a budget, track expenses and set financial goals. However, one of the most difficult aspects of budgeting is being able to stick to it day in and day out. Individuals who have had to readjust their budgets repeatedly — for inflation, student loan payment plans and a possible recession — may feel overwhelmed by the idea of making another round of financial adjustments.
What can help is establishing a budgeting system where the focus is taking it one day at a time. Gabe Krajicek, CEO of Kasasa, said to start by taking your total monthly income and subtracting your usual bills and savings goals. The leftover amount is your discretionary income.
Example: You bring home $5,000 monthly after taxes. You have $2,000 in bills and your goal is to save $1,000 a month. This leaves you with $2,000 for discretionary spending, which can help cover variable expenses such as groceries and gas. You would take your discretionary income and divide it by 30. This amount is your daily budget.
“Keep a rolling total of how much you spend over or under each day so that you can shift your daily budget each morning,” Krajicek said.
In this example, your daily budget on the first of the month would be $67. 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 are able to narrow your outlook and make budgeting more palatable.
Choose a Way To Budget That Works for You
You may find you’re able to budget by focusing on one day at a time or perhaps you prefer using another method, maybe the 50/30/20 system or a budget that emphasizes paying yourself first.
Whichever method you prefer, Tanya Peterson, a vice president at Achieve, recommends budgeting in a 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.
View Money as a Tool
During times of economic uncertainty, it’s easy to shelve personal financial aspirations in favor of saving the most money you possibly can to get through the difficult period. Rather than spend every waking moment focusing on dollars and cents, Krajicek recommends reminding yourself of the reason behind the action.
“Savings gives you freedom to choose, rather than the feeling of being stuck in a situation because you rely on a paycheck,” Krajicek said. “Think of your savings as your own personal financial safety net that only you are in control of; (it) allows you to live your life on your own terms.”
While there’s more than enough advice available on how to pinch pennies and slash monthly bills, Krajicek recommends viewing 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 to identify what is most important to you. Make decisions based on your non-negotiables. For example, if exercise matters to you, you might switch to a gym that has a less expensive membership. If you enjoy using streaming services for entertainment, keep your subscription to one streaming platform rather than two or three.
The more diligent you are about tracking expenses, the more you will be able to achieve a certain level of financial security. Then, when unforeseen circumstances arise, you can take calculated risks and experience peace of mind.
When a Budget Becomes a Spending Plan
Over time, a careful budget that views money as a tool will evolve into a spending plan that helps you do and have the things you want in life. Peterson recommends writing down the important goals you have for the future — e.g., sending a child to college or retiring — and developing a budget to meet these goals.
“The idea is that you will review and modify those goals and your budget month to month, year to year, throughout life — recession or not,” Peterson said. “Adopting this attitude and habit as best practice will set you up for much greater financial stability and success.”
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This article originally appeared on GOBankingRates.com: A Possible Recession in 2023 Means You Need To Do These Things for Your Budget