How to Prep Yourself Financially in Times of Crisis
If the recent lockdown and market turmoil are any indication, tough times can happen without warning.
In some cases, bad events come in the form of a layoff, sudden personal financial crisis, or unexpected illness.
When such a crisis hits, are you financially prepared? What have you planned for the unexpected? And how are you preparing for similar instances in the future?
In this post, we provide you with several ways to make your finances strong enough to withstand storms of any kind.
Not sure if you have the capacity to make this happen? Prepare to be surprised.
How to make your finances recession-proof
1. Pay off your debts
Doing so will create room in your budget for something else, like getting started on an emergency fund or creating cash flow. This is especially true if you pay off high-cost, high-interest debts.
Besides, do you really want to be saddled with debts for a long time? You don't want to have unpaid loans either when, by some unfortunate event, you suddenly lose your job.
Learn how to manage your debts and stick to a payment schedule. This will help you juggle payments better and prevent your accounts from going into default.
2. Reduce interest bill
Do you have a sizeable credit card balance with high interest? If you can't pay it all off at one time, move it to a card with a lower interest rate. This way, the interest rate is cut and repayments become more manageable. You should also look for credit cards that accept bank transfers at 0% into APR.
Now, remember not to incur the same debts after you've cleared them.
3. Increase emergency savings
Do you have an emergency fund set up? Good for you.
Now boost the amount of money you funnel into it to cushion you for any financial crisis.
At the very least, you must have a cash reserve that is worth three to six months of your living expenses. Even when you suddenly lose your job or are unable to work for one reason or another, you won't be struggling to make ends meet for the next three months or so.
To build a cash cushion:
- Pay off debts if you have any
- Save any extra cash you have to your emergency fund
- Look into a high-yield savings account so you earn from the cash you’ve stashed away
4. Cut back on expenses
When was the last time you checked your monthly expenses and spending habits? Did you know that the morning coffee you buy every day seriously adds up over time and not in a good way?
If you look closely, the amount you spend on a cup of coffee could have made a good investment start-up if you had saved it up.
Stop haemorrhaging money. Use free personal finance apps/tools to track your behaviour towards money.
Here are some of your options:
Mint – The app tracks your transactions and categorises them into Immediate Obligations, True Expenses, and the like. The app also provides you with periodic credit score checks at no expense to you.
PocketGuard – Tells you how much you can spend for the day, week, month after setting aside money for bills and savings, etc.
Wally – Allows you to set a daily budget and savings target.
MoneyStrands – Linked to your bank accounts, the app helps you track your expenses, balance, spending habits, and whether you can afford to indulge in extras.
YNAB (You Need a Budget) – Not exactly free, but this app helps you focus on your budget and track your spending to determine where you're wasting money needlessly.
It would also make a huge difference if you live within your means. Experts recommend keeping your spending on discretionary items at 30% or less but not higher. Your focus should be on essential expenses.
Any extras you have after you’ve paid off all your dues should go toward vehicles that will cushion you in times of major financial crisis. This includes an emergency fund, savings accounts and investments.
5. Adjust your investment portfolio
It's easy to think that your finances are recession-proof when you have both short- and long-term investments. During a bear market, however, no one is safe.
To prevent a major fallout:
- Rebalance your portfolio and ensure most of your eggs are not placed in one basket.
- Reassess your risk tolerance as your portfolio changes and when you plan to cash out your investments. If you want to use your money sooner, taking a conservative approach is the best route.
- Sell your company's own stocks to prevent a two-time loss. You want to protect yourself from major losses when your company collapses, the same way that happened to some entities now due to the coronavirus pandemic.
6. Review your biggest assets
Are you planning to sell your house in the next few years or just until the recent crisis passes? The best time to do so would be when the market conditions are good.
But don't put it off too long. A recession might happen that will cause the real estate market to simply vanish.
7. Invest in yourself
During tough times, it isn’t just your finances that suffer. Your life will too.
Why not make it recession-proof as well?
If you have a bachelor’s degree or higher, you have a lower unemployment rate. Education is also the vehicle with which to build a financial buffer, according to economists.
So invest in continuing education and develop your skill or build new ones.
With higher education and newer skills acquired, you can better defend yourself against a financial crisis.
8. Create a second or passive income stream
When you have a second income stream, you can easily avert a financial crisis or protect yourself against it. So make sure to set up a passive income or boost what you already have now.
While you're still able, find ways to make extra money and make sure to funnel your earnings into your stash.
There’s no shortage of avenues for passive income. You just need to choose what works best for you so you can earn more without doing more.
9. Stay updated on financial/market news and do your own research
The economy is unpredictable. Recession and whatever events that happen can come without warning. The best solution to stay in control amidst such financial uncertainty is to educate yourself about finance.
Developing financial literacy will allow you to process information to help you make more profitable investment decisions.
- Will you earn more when you invest in stocks or bonds?
- How much of my income should go to my emergency fund?
- Should you learn to trade foreign currencies to diversify your investment portfolio?
- What's the difference between active and passive income?
These questions are easier to answer if you are knowledgeable on the subject of finance.
On that note, check out educational, informative, and valuable resources of Fullerton Markets that are prepared by our Research and Education Team. We have weekly LIVE webinars covering world events and market developments, as well as regular market research posted on our blog.
Knowledge, as they say, is wealth. So take advantage of every available resource at your fingertips.
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