Best practices: How to handle money in a recession
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Best practices: How to handle money in a recession

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Best Practices: How to Handle Money in a Recession

The last big economic downturn in the U.S. might have been named the Great Recession, but that was before anyone had heard of COVID-19. Already in 2020, unemployment rates have reached nearly 15%, surpassing the Great Recession level of 9.9% in 2009. The culprit behind the economic upheaval is the coronavirus pandemic, which has forced businesses to close temporarily to protect public safety.

And so, 10 years after the last big recession, it's time to get reacquainted with what happens when the economy goes sideways. You already know a recession creates high unemployment and stock market volatility. But it might also drive prices up and push home values and interest rates down. In other words, income is harder to come by, your lifestyle costs you more, and your biggest assets are worth less.

That's a triple threat to your financial well-being. You can protect yourself and your finances with these four money-management strategies.

1. Downsize spending

Cutting back your spending when prices are rising is like swimming against the tide. You'll have to get seriously detailed about where your money is going. Start by adding up all of your required expenses, including rent, utilities, food for your family and pets, insurance premiums, and minimum debt repayments.

Look for savings opportunities in these essentials. Food is often a good place to start. Make use of coupons, store loyalty offers, generic brands, and sale items. Give up soda and alcohol. Learn how to cook a meal using just three or four ingredients. You can also adjust your thermostat, shop around for cheaper insurance, and try to negotiate lower interest rates on your debt.

Next, analyze and cut back on your nonessential spending. You might cancel your cable and streaming services and rely instead on your Amazon Prime membership for television and music. Downgrade your cell phone plan. Put a spending freeze on clothing and home decor purchases.

After those changes, remember to track your spending relative to prior months. You're making tough choices now to spend less, and you've earned the satisfaction of seeing your progress.

2. Pay down debt

Tracking your reduced spending is motivating, but it also empowers you to make other financial decisions confidently. If you know you've slashed spending by $250 monthly, then you also know you can increase your debt repayments by that same amount.

High-rate debt can strangle your finances and reduce your ability to manage through recessionary conditions. Get motivated to pay these debts down once and for all. The first step is to stop charging immediately. Then make a list of your debt balances and the interest rates. Choose one account to pay off first.

To keep your interest expenses low, you'd pay off the highest-rate card first. But if you want to free up cash fast, you'd pay off the lowest balance first. Either strategy works. Send as much as you can afford to that first target account and make minimum payments on the rest. Once the first account is repaid, move on to the next one.

3. Establish new sources of income

Adding a new source of income gives you more cash for debt repayment and savings while reducing your complete dependence on your regular job.

Admittedly, it's tough to make more money in a recession. You can try gig work, like personal shopping for Instacart. Or market your professional skills on Fiverr, Upwork, Guru, or TaskRabbit. You could also try picking up gardening work or outdoor home-repair jobs from your neighbors. If you're crafty, you can sell jewelry or other custom pieces on Etsy. Or sell your old stuff, like clothes on Poshmark or electronics on Gazelle.

4. Diversify your holdings

Make sure you are invested in a variety of industries and asset classes so you're not absorbing the full force of every market dip. You can diversify by investing in mutual funds or exchange-traded funds across asset classes -- equities, debt, and commodities. If you want to hold individual equities instead, have at least 20 separate positions and focus on dividend payers and less volatile sectors, like consumer staples and utilities.

And don't forget about the importance of holding extra cash in a recession. Your cash balance won't produce returns, but it will help you avoid debt if your income changes. Your cash fund should be enough to cover at least three months' worth of your living expenses.

Get financially conservative in a recession

When the economy contracts, that's a signal to get more conservative financially. Slash your spending, pay down debt, find new ways to make money, verify that your portfolio is diversified, and keep a nice balance of cash on hand. These money habits are useful during all economic cycles, but they'll serve you particularly well in a recession.

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