5 Changes You Should Make to Your Spending Habits To Be Ready for a Recession
For months, economists and analysts have sounded the alarm about a pending recession. High inflation and high interest rates have raised the cost of everything from credit cards to auto loans to mortgages for consumers.
Businesses are also getting hit, as raw materials and corporate financing expenses are higher as well. These costs are ultimately passed along to consumers, making it harder to get by on what you’re already earning.
If rising costs continue, they may trigger a recession. Whether or not that ultimately happens, this combination of factors makes it a good time for consumers to conserve their cash flow and make necessary adjustments to their spending habits. Here are some of the top suggestions.
Trim or Eliminate Discretionary Spending
The best and easiest change you can make to reduce your spending is to trim or even eliminate your discretionary spending, at least temporarily. Generally speaking, Americans earn enough money to pay their bills, but they get into trouble with debt and overspending when it comes to “wants” instead of “needs.”
By cutting out things like eating out, drinking at bars or even binge spending at your favorite retailer, you may be surprised to see how much money turns up in your monthly cash flow. Although reviewing your budget like this is always a good idea, it’s of particular importance during recessionary periods.
Defer Spending
Deferring spending is a tool commonly cited by financial pundits to help keep people out of debt. As impulse spending is an easy way to spend money you don’t have, it’s a good idea to simply wait 24 hours before you make any large purchases. Oftentimes, waiting overnight is enough to make you realize that you don’t really need what you wanted to buy, and you’ll end up keeping that money in your pocket.
If a recession is on the way, however, you might want to extend this strategy to even more items. Rather than deferring purchases overnight, consider delaying them for a few months. If you need new windows in your house, for example, perhaps put down a deposit to lock in current pricing but avoid installing or paying for the remainder for 6-12 months. The same goes if you want a new TV, an upgraded computer or the latest smartphone.
If you absolutely need new windows to keep your home safe, or if you need an upgraded computer to get a new job, obviously these are exceptions. But if you simply want to upgrade to a nicer lifestyle, consider deferring those purchases for at least a few months to conserve some money.
Spend More Time Shopping Around
It’s always advisable to shop around to get the lowest prices on your purchases, but it becomes more of a necessity with a recession on the horizon. In addition to comparison shopping at local stores, scour the internet for the best deals you can find on the items you need.
When expanding your search, you’ll have to use precautions, such as checking out only the retailers you know have legitimate websites and that don’t gouge you with hidden fees or exorbitant shipping costs at checkout.
Also, be aware that shopping online can often expose you to temptations to buy additional products that you don’t really need, so you’ll have to be sure you can stick to your plan to buy only the item(s) you’re actually shopping for.
Pay Off Debt
Paying off debt is a fundamental savings strategy, and it becomes even more important if a recession may be on the horizon. Interest rates are typically high heading into a recession, meaning any debt you have is accruing interest at a rapid rate. Not only is that a significant drain on your current cash flow, it could prove disastrous if you lose your job and have no means to pay back what you owe.
Rather than spending money on additional purchases, use as much of your cash flow as you can to pay that debt off, and you’ll be better prepared to get through a potential recession.
Boost Savings
Simply diverting as much as possible of your spending into savings is a great way to prepare for a recession. Although most advisors suggest keeping at least three to six months of income in an emergency fund, the truth is that most Americans fall short in this regard. As recessions often bring job loss and other economic hardships, it’s best to boost your emergency fund as much as possible while you still can.
In a worst-case scenario, you’ll then have the funding necessary to make it through the recession. But in a best-case scenario, the recession comes and goes without any effect on your household, and you come out on the other side with a fully funded savings account.
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