Most people are in some way impacted by an economic recession. Middle-class people who are living paycheck-to-paycheck can prepare for financial rough patches such as a temporary loss of job, pay cut or inflation by getting their finances in order. It pays to have a sound financial plan in place before a sudden change in the family’s finances. Many financial experts warn of a global financial crisis as well as the possibility of an extended economic recession or even depression. Some people will be better able to weather a financial tsunami than others.
Preparing for inexpensive housing
One of the most important parts of a budget is the housing category. It’s critical to decide on a backup plan for housing in case of job loss or significant reduction in income. People who experience job loss may have a more challenging time refinancing their homes. That’s why it’s important to look into a mortgage refinance while still employed. Instead of choosing a 15-year mortgage, select a longer term that still offers a low interest rate. It’s still possible to pay extra on a mortgage, but obtaining a fixed rate with a longer term will mean a lower mortgage payment and greater cash flow when times get tough.
Building up an emergency fund
Although it’s great to have a lot of money saved for retirement, it’s even more important to have a fully-funded emergency fund. It’s a lot easier to withdraw money from a savings account after losing a job than it is to tap into a 401(k) or IRA plan. In fact, people who are younger may have to pay a 10 percent early withdrawal penalty. To prepare for an economic recession, work on building up a rainy-day fund first before saving for retirement. The only exception is to save as much in an employer-sponsored retirement plan as needed to receive the company match.
Getting out of debt
It’s better to get out of debt while still employed than it is to try to pay the minimum payment due on credit cards or student loans on an unemployment check. Since student loans can’t be discharged in bankruptcy, it’s important to make student loan repayments a priority. In terms of credit card debt, focus on paying off the debt with the highest interest rate first, while still making minimum payments to avoid late fees and charges.
Becoming a survivalist
Being a survivalist doesn’t have to mean that a person raises his or her own chickens or knows how to build a home. However, it doesn’t hurt to know how to do handyman jobs around the house as well as grow basic produce in order to counteract food inflation and other rising costs. Make a habit of mowing the lawn and doing household chores to save money even when times are good.
Giving up bad habits
Experts say poor people spend more money on junk food, fast food, cigarettes, drugs and alcohol compared to wealthier people. To survive an economic downturn, don’t leave any room in the budget for bad habits. People who can kick a bad habit now can save hundreds and thousands of dollars when money becomes tight. Take the money that used to be spent on beer or cigarettes and funnel it into an emergency fund.
No one wants to live through a double-dip recession or an economic depression, but economic cycles are normal. The key to becoming financially stable, or even wealthy, is to stay out of debt and save when times are easier. People who paid off their homes during a prosperous economic cycle don’t have to worry about losing their homes in foreclosures during a recession. By preparing ahead of time, middle-class people can maintain their socio-economic status or even climb the ladder.