If you haven’t had the time to follow any news not directly related to Covid-19, then the official pronouncements on the state of our economy can be somewhat confusing. Barely a month after we were declared to be in the middle of a recession, we’re now hearing that it’s over and signs are pointing towards recovery.
The current economic climate is like no other period in living memory. The recession of 2020 was triggered by a sudden and severe global event in the pandemic. This dramatic, steep crash naturally made it easy to start trending up, as we learned to live with lockdowns and social distancing.
But just because we’re on the road to recovery doesn’t mean the journey will be easy. The recession might be over officially, but you still have to manage your finances as though it were still ongoing. You already know that it’s time to tighten the purse strings, but how do you go about it?
Lessons from the past
It can be easy to define and separate what’s essential versus non-essential under the current circumstances. For instance, face masks, toilet paper, sanitary wipes, and other disinfection-related supplies are all necessary. Clothing and shoes are hardly urgent with our restricted mobility and activities.
But what about potential gray areas? Garage door repair can serve both cosmetic and security functions. You could make a case either way for this sort of spending.
Despite the differences across the years, we can learn from the most recent recession. The US Bureau of Labor Statistics gathered data from the previous boom-bust-recovery cycle around the Great Recession of 2008. Consumer behavior reflects both conscious and subconscious responses to tighter economic conditions.
There are some important takeaways from that data. First, the relative importance of food goes up, and particularly food at home. Second, people held off on spending on durable goods such as cars and appliances or bought secondhand instead. Third, the relative weight of rent increased, and so did the ratio of renters to homeowners.
You can anticipate these changes in your budget. Housing and food are going to take up the majority of your expenses. It would help if you can cut costs in these areas, for instance by planning home-cooked meals and buying in bulk at a farmer’s market. Equally, it means every other kind of purchase must be subject to intense scrutiny.
Technically, it’s not that complicated to budget your expenses these days. If you never could manage to organize notes and journals, there are many apps now that can help you out. What’s difficult is adhering to your plan.
Developing the necessary discipline is going to take some time and deliberate effort. Every day, you’ll have to use your judgment to evaluate whether or not spending on something is necessary. And you’ll need the willpower to stand by that decision.
But there are two ways to make it easier for you to build up this habit. The first is to get rid of debt, both existing debt and the option to use debt to pay off your expenses. Financial tools can help you automate debt payments; get started now, because the longer you wait, the heavier the burden will get.
The second way is to automate the transfer of some money to your savings account for an emergency fund. These two simple and automated processes will ease your journey to financial discipline. By immediately taking the money out of your hands, you will be forced to learn how to live not just within your means, but below them.
Diversify your income
Surviving through a recession isn’t entirely about frugality. Exploring your options when it comes to income generation is the other part of the equation.
In this uncertain climate, we don’t know how things will turn out. There could be a double dip, or the impact could be felt many years into the future. Job security is difficult to guarantee when not even businesses are certain how they can sustain their operating models moving forward.
You don’t necessarily have to take on a second job, but it’s useful to know your options and be prepared to pivot if anything happens. Perhaps more importantly, every capable member of your household should be able to contribute income in some way.
In this time of sudden turbulence in our lives, you need to forgive yourself for any lack of preparation. Never mind that you might have set aside more money or paid off your debts in the past. All that matters now is how you move forward, learn, and apply these lessons to ensure your stable financial footing.