One of the questions I get asked most frequently by people who know that I blog about money is how to prepare, generally or specifically, for things to get worse.
Most of us want to believe that things are looking up and we’re coming out of the recession. That may well be the case, but based on the questions I continue to get, there’s a small part of us that’s scared to pieces and looking for advice on the “what ifs.”
While I generally try to keep things positive at Fiscal Fizzle, let’s make an important and useful assumption just for today–that things will get worse before they get better. Even if we’re already out of this recession, it can be a lesson in preparation for future economic downturns.
These are long-term principles. They are beneficial whether or not you believe worse times are coming, and are life-long ways to have a better relationship with your money.
1. Contract & Hoard
There’s a good reason why this point is first–it’s the best mentality to adopt when you think bad times are ahead. However, contracting your expenses and hoarding your income doesn’t mean you shut yourself inside and spend nothing.
You have to strike a delicate balance between being able to continue living somewhat normally and diverting a larger percentage of your income to savings. Frugality is a keyword that comes to mind immediately.
2. Create a Leveled Contingency Plan
There’s a great post at Bargaineering from a few weeks ago that discusses conducting financial fire drills–preparing for potential pitfalls through planning and practice. I think this is a great way to prepare for singular events that affect your money.
When thinking about a contingency plan for a potential or worsening recession, many people get stuck with thinking in absolute terms–“now I’m doing well, tomorrow I will be doing poorly.”
Life rarely works like that–unlike a sudden catastrophic event like a medical emergency or accident, recessions affect us more like a slow decay–eating away at the tree, rather than chopping it down.
I suggest a different, more layered way of looking at your plans. Think in terms of stages–what happens if I get a 10% pay cut…what if I get laid off? What if both of us get laid off? What if we lose our house? Boil down to the most catastrophic (likely) “bottom” and stop (no sense in getting yourself really depressed).
3. Cherish Diversity
Diversity in all things is usually a good idea. When it comes to your money, it’s almost vital.
Income diversity might consist of multiple streams of income–regular salary, investments, side hustles. It might also come in the form of both parents working to mitigate the threat of the single working parent losing their job and cutting off 100% of the family’s income.
Diversity can be other things, too–something as simple as shopping at two grocery stores to take advantage of both store’s sales, or using multiple tools to show you different aspects of your money.
4. Increase Options; Decrease Commitments
When incomes start falling, your first line of defense is cutting back on unnecessary expenses. Anything that could be considered a commitment (loans, service contracts, leases, etc.) will stand annoyingly in your way.
If your income is questionable or your savings are scarce, stay away from anything you can’t “dump” when the winds of change shift. Great “options” are month-to-month contracts and paying cash!
5. Think Classic & Traditional
If people were doing it 50-100 years ago, chances are it was a frugal and effective way of doing things. Think about it–cooking at home, conserving resources like water, and saving a large percentage of your money–it used to be that these were unquestionable ways of living.
People were also more self-reliant. Families lived together, they grew their vegetables in the back yard, and learned to re-use much of what we consider trash today.
Somewhere along the road, we’ve lost our way. We decided that an obsession with convenience, speed, and consumption was somehow sustainable. Now we’re getting our butt kicked for it.
Emerging from The Tunnel
As we all hope, the light at the end of the tunnel may be very close. Whether times turn for the worst or for the better, the strategies I’ve outlined help you stay prepared for what’s coming.
Assuming we’re emerging into better times, you may not need many of these strategies to survive, but they will not only put you in a better position to emerge strong, but will prepare you for the next inevitable downturn (more on that another day!).