How to Spend Money During a Recession

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Recession is a word you are hearing more and more as the U.S. economy struggles with record-high inflation and rising interest rates. While the current economic downturn hasn't been classified as a recession just yet, economists point out that the gross domestic product (GDP) and economic activity are showing signs of slowing down. It's the right time to think about how to spend (and save) during a recession.

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Some analysts point to two consecutive quarters of declining GDP as the mark of a recession. The National Bureau of Economic Research (NBER) prefers a more detailed view that includes the identification of "a significant decline in economic activity that lasts more than a few months." With this kind of talk hitting the headlines, Americans are looking for ways to recession-proof their personal finances and make financial decisions to help prepare in case a recession hits.

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Rebalance Your Household Budget

If you don't already have a household budget in place, get one started. Make a balance sheet of your personal finances by listing everything you owe and everything you own. This will help give you an idea of your net worth and what liquid assets you have that you may be able to access quickly if needed.

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Then it's time to track your spending and look at your fixed, periodic and variable expenses.

The Federal Trade Commission has a general budget worksheet and a cash flow budget worksheet that can provide a start. There are also budgeting apps like Mint or Simplifi to get you started, lead the way and keep you on track.

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If you keep detailed records of what you spend, you may be able to start with last month's income and expense numbers and get started on a budget right away. Or you can start today and track for an entire month's cycle to capture all of your regular, variable and periodic expenses.

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Knowing your net worth gives you a snapshot of your overall financial state at this moment in time. Creating a budget reveals where your money goes and might help uncover extra money you can reallocate to help recession-proof your financial plan.

Thanks to inflation, you are spending nearly 9 percent more of your income each month without changing anything at all. So, it's an excellent time to make some spending changes on essentials and nonessentials.

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Lower Your Living Expenses

Living expenses include housing, food, clothing, fuel, transportation, medical care and other basic necessities of life. Many of these items are what the Consumer Price Index (CPI) measures. The CPI is ​8.6 percent​ higher than last year, with food up 10 percent and energy up nearly 35 percent.

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Thanks to inflation, you are spending nearly ​9 percent​ more of your income each month without changing anything at all. So, it's an excellent time to make some spending changes on essentials and nonessentials.

Since the Federal Reserve (Fed) raised interest rates, refinancing your mortgage to save money may already be out of the question. You may be able to save money in other areas such as energy use, utility bills, food bills and cell phone service. When you can trim spending in any category, you free up cash flow for saving or reallocation.

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Then there are the nonessential living expenses such as eating out, streaming services, gym membership, entertainment and shopping. While it is essential for any budget to include some fun, consider which expenses you can live without for a while and divert those discretionary funds toward your savings account, emergency fund or credit card debt.

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Pay Down Credit Card Debt

When the Fed raises interest rates, your credit card issuer or lender may turn that increase right over to you. While the credit card issuer sets its own prime interest rate, you can expect your APR to increase when the Fed hikes.

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If you are able to pay down your credit card debt, now is a great time to knock it out. Start with your most expensive card first and work your way down. Or tackle small balances first and work your way up. Whatever works for your budget and keeps you motivated.

If you have a great credit score, you may be able to negotiate a lower interest rate now to help save on future expenses. Other options include transferring a high-interest credit card balance to a zero-interest or low-interest card or securing a lower, fixed-rate personal loan or home equity line of credit to pay off your credit card debt.

Before moving debt balances from one lender to another, check with a financial adviser to ensure there aren't any penalties or fees that might foil your savings plans.

Build an Emergency Fund

Recession or not, having emergency savings in case of job loss is an integral part of your financial plan. Many banks and credit unions suggest putting away at least three to six months' expenses. This is where your budget comes in handy again. If you were to lose your job today, how much money do you need each month to cover the absolute necessities?

If putting aside that much extra cash is difficult, do what you can to start socking a little away at a time. The Consumer Finance Protection Bureau (CFPB) recommends setting a goal and finding a way to contribute even a small amount through automatic transfers regularly. Apps like Digit and Mint can help you start setting aside emergency funds.

You can put the funds in a savings account or a piggy bank as long as it's easily accessible so you can reach it quickly in an emergency. Talk with your certified financial planner (CFP) about securing the right spot for your emergency fund.

Find Additional Streams of Income

If there is one way to help boost your emergency fund, pay down your credit card debt and balance out the household budget, it's finding another income stream. In today's gig economy, finding a side hustle, picking up freelance projects or renting out personal real estate are accessible options for those wanting additional income.

Platforms like Upwork and Fiverr post professional and creative opportunities for freelancers, while companies like Uber, Lyft, Grubhub and DoorDash provide ways to earn money through transportation or delivery-based services. If you are willing to engage in short-term property sharing, you can rent out living space through Airbnb, VRBO and others.

Depending on your skill set, resources and availability, there is a platform where you can search for side jobs. Increasing your cash flow is a great way to be prepared for a recession.

Talk to Your Financial Planner

In addition to watching your spending, reducing your expenses and finding ways to bring in and save extra cash, you probably want to keep an eye on your retirement account and investment portfolio.

The stock market's volatility has been relatively constant since the pandemic, inflation has been on a steady climb, and the Fed has raised interest rates three times in 2022. All of this has an impact on your investments. It's a good time to sit with your financial adviser and determine if you need to adjust your investment strategy and retirement plan.

Christine Benz, Director of Personal Finance at Morningstar, recommends ensuring your investment portfolio includes goods and services that sell well in any economy, such as consumer staples, pharmaceuticals and utilities. Benz also touches on the importance of cash flow, emergency savings and careful consideration of your risk tolerance when considering new financial obligations

When considering how to spend in a recessionary environment, the answer is: carefully. The bottom line is to watch your budget, trim your expenses and discuss your asset allocation and financial goals with your financial adviser.

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