Avoid Common Financial Mistakes to Recession Proof your Finances
If you’ve kept up with recent news, you’ve probably heard the term “recession” quite a bit. For many, mere mention of the word can induce fear, which can quickly turn to panic as cost of goods soars and interest rates begin to rise.
Being concerned is valid, but don’t give in to scare tactics that could cause you to make rash decisions with your personal finances. Instead, focus your energy on making positive, well-informed decisions that establish and solidify good financial health.
At Origin Bank, our trusted advisors are here to guide you through good times and bad, with tips to help you avoid common financial mistakes, safeguarding your personal finances so you can achieve your short- and long-term financial goals and weather any financial storm.
What is a recession and how does it affect me?
Understanding what a recession is and how it can affect your personal finances underscores the importance of establishing good financial habits, so you’re in the best possible position when times get tough.
A recession is defined as a significant, widespread and prolonged downturn in economic activity lasting six months or more. Recessions occur when the nation’s economy experiences a combination of negative factors such as rising unemployment, falling retail sales, and declines in production and manufacturing for at least two consecutive quarters. For a comprehensive look at the economics, including what the difference is between a recession and a depression, check out this article by Forbes.
Recessions can affect individuals and families in a number of ways, many of which you’ll notice in your everyday life. You can expect to pay more for groceries, gas and clothing as the cost of goods increases. In addition, the price of services, from haircuts to home repair, will also rise so be prepared for the immediate impact this will have on your finances.
High inflation during a recession can negatively impact the stock market, so you’ll probably start to see a downward trend in earnings on your investment accounts. Keeping an eye on your retirement accounts and investment portfolios is smart, just remember that stocks rise and fall all the time, so try to take it all in stride.
What can I do to combat the negative effects of a recession?
Whether during a recession or in good economic times, following these tips will help you make smart financial decisions and avoid common financial mistakes.
DON’T: Waste your money on too many discretionary purchases.
DO: Analyze your spending and look for ways to scale back.
Even small changes can make a big impact, so look for ways to save like:
• Cook more and dine out less. Plan your meals in advance so you can build your shopping list, taking advantage of in-store specials and coupon savings.
• Examine your phone plan. If you’re not using all the data in your monthly plan, it may be time to downgrade if it means savings. Or, if you’re consistently going over your data usage, it may be more cost effective to increase your monthly rate plan than to continue paying hefty overage fees.
• Scrutinize your TV consumption. Cutting the cord, a term for canceling cable TV services, has become a popular trend as an easy way to save money. But don’t stop there – take a look at what you’re paying for streaming services and determine if you watch enough to justify the expense of keeping every app.
DON’T: Spend every penny you earn every month.
DO: Set aside funds every month for savings.
Having a savings account to fall back on when you need it is a smart way to prepare for life’s unexpected challenges.
• A penny a day. Ok maybe you need to save more than that but setting aside as much as you can comfortably afford to, no matter how small, will add up over time.
• Emergency savings. If your budget will allow it, experts suggest establishing a regular savings account as well as a separate savings fund dedicated to emergencies.
DON’T: Overpay on housing.
DO: Make sure you’re living within your means. It can be tempting to lease an apartment or buy a house beyond your budget, even if you’re approved to pay more. Taking on too much rent or mortgage payments could mean forgoing other financial goals or feeling financially pressed every month.
• Rule of thumb. Experts suggest you spend no more than 30% of your gross income on housing. Run the numbers and plan ahead before signing a lease or buying a home.
• Room for rent. If you’re already locked into a lease or mortgage and are looking for ways to offset your monthly payments, consider renting out a room in your home to a third party. This article by MoneyCrashers.com has tips for how to rent out a room safely and legally.
• Check out the benefits. If you work from home, even a few days a week, or use a space in your home for a side-hustle, you may be able to claim a portion of your living space as a tax write-off. Consult with a certified accounting professional to explore your options.
DON’T: Make short-term investment changes due to market fluctuations.
DO: Remember that investing is a marathon, not a sprint.
When the stock market goes down, you may be tempted to sell investments at a loss and put money into more conservative funds that feel safer. Instead, take a moment to think things through so you don’t make rash decisions out of fear.
• It’s not really a loss. Even if you’ve seen a loss in your investments, you’ll only feel that loss if you take the money out.
• Play the long game. Recessions are temporary and their negative impacts won’t last forever. As the experts say, investing is a roller coaster ride and the only people who get hurt are the ones who jump off. Instead, ride out the recession and wait for the upswing to happen.
• Consult with the professionals. If you’re feeling overly anxious and could use some reassurance about the state of your investment funds, reach out to a trusted financial advisor for advice. They can help you understand the short- and long-term impacts of a recession and can put things in perspective so you have peace of mind.
DON’T: Raid your retirement savings.
DO: Make sure you’re putting away enough to meet your retirement goals.
When times are tough, some consider borrowing against, or even cashing out, their retirement accounts. Hefty taxes and penalty fines make this a less than ideal option, with short-term benefits that don’t out-way the negative long-term impacts.
• Remember your goals. If you cash-out all, or even a portion, of your retirement savings, how will this impact your ability to retire when you want to? And if you borrow against your retirement savings, will you have time to pay it back by the time you want to retire? Make sure you’re looking at the big picture so you don’t let short-term fears disrupt your long-term retirement goals.
• Talk to the pros. If a recession has impacted your ability to make ends-meet, talk to a professional accountant or financial advisor to explore your options. Using retirement funds to pay bills should be a last resort, so let a professional work with you to find the best solution for your financial situation.
At Origin Bank, we understand the importance of making good financial decisions to carry you through a recession and beyond. In addition to these tips, we recommend having a financial plan in place so you’re well prepared for economic challenges.
If you’ve never established a budget or set aside savings regularly, it’s not too late. Start building good financial habits now so that, even in the midst of a recession, you can get your personal finances where they need to be. Check out our blog to help you get started.
Whether your financial plan is well established or you’re just starting out, Origin Bank’s trusted advisors are available to help with your financial needs. Visit our banking center locations across Texas, Louisiana or Mississippi or contact us toll free 24/7 at 1-888-292-4037 to learn more.