First of all, what is a recession? The National Bureau of Economic Research defines a recession as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” (Investopedia)
Gita Gopinath, the IMF’s chief economist, said in the latest World Economic Outlook report, “It is very likely that this year the global economy will experience its worst recession since the Great Depression, surpassing that seen during the global financial crisis a decade ago.”
What is the average American to do? FREAK OUT?!
Would you agree that it makes more sense to focus your time & energy on your own personal finance picture than give into fear? Because recession or not, a firm financial foundation will help you fend off a layoff, medical emergency, or recession at any time. So rather than spending time watching / reading the news for hours, which is enough to bring anyone down, why not invest that time into establishing healthy financial habits: living on a budget, paying off debt, saving for emergencies, investing toward retirement, and helping others. I know it sounds like no fun, but the peace that you’ll experience will be worth it!
Basically, preparing for a recession is just adopting basic healthy financial habits.
BUDGET – A budget is a snapshot of your financial health and helps you plan for where every dollar that you take in will go. You are in control – you still are, even if your income has decreased. For your first cut at budgeting, you can look at taking your monthly income (or biweekly income) and splitting it up, as some recommend, into 50% towards essentials (food, housing, utilities, transportation, and minimum credit card / loan payments), 30% towards non-essentials (dining out, clothing, outings), and 20% toward savings.
If you’re suffering a job loss, you may not be able to put anything toward non-essentials or savings, but how can you budget for the essentials? This is where you will want to get creative and look for ways to cut expenses and increase income.
To get to a bare bones budget, you’ll need to cut non-essentials and reduce as many essentials as possible. You can cut some expenses entirely (cable, subscriptions, sell extra vehicle) or partially (call utilities, credit card companies, insurance companies, etc… and see if they’ll reduce charges or interest rates…). You can change your spending habits, use cash or cash-less envelopes instead of credit cards, plan meals so there’s less waste, use coupons, stop purchasing online, etc...
You can look at increasing income by selling stuff on Facebook marketplace or Amazon marketplace, selling clothing on Poshmark or Mercari, helping others mow their lawn, mulch their beds, fix their cars, do freelance work for a friend or family member who still has their job, etc…
Here’s also where you’ll want to evaluate how you will use your stimulus check, assuming that you are getting one. For those who are really suffering financially, meeting your essential needs first is critical. If you have anything left, then perhaps adding to your emergency fund as a cushion for next month.
DEBT – If you have been working a debt snowball or debt avalanche and have a stable job, then you should consider staying the course with your debt reduction plan. However, if you’ve lost your job or hours, or have any kind of job insecurity, it may be wise to move any extra debt payments you’ve been making to your expenses or emergency fund. Of course, you’ll want to make sure you are still making your minimum payments on housing, loans, and credit card debt, so you don’t end up with other problems to deal with later.
Once you are back on stable financial and footing with your job, you can resume your debt reduction with a vengeance, and put it behind you forever.
EMERGENCY FUND – this goes hand in hand with your budget. Even if you have 6 months of expenses set aside for emergencies, if you’re out of work, your emergency fund will start getting depleted. That’s okay, since that’s what it’s for, but in our current economic landscape you may want to cut way back on your normal expenses, so your emergency fund lasts longer and doesn’t take as great a hit. Likewise, if you barely have an emergency fund, you are going to want to get to a bare bones budget and see how far you can stretch what you do have.
Once you’ve recovered from all the repercussions of the coronavirus and financial hardship, my recommendation is to aggressively finish paying off your debt and to get your emergency fund ramped up. Set a goal for your emergency fund of at least 3 months’ worth of expenses to start. If you determine 3 months of expenses to be $9,000, for example, consider moving $1000 a month into the fund or $500 every 2 weeks. That will get your emergency fund funded in 9 months. If that’s not practical, tighten your belt as much as you can and do everything in your power to get an emergency fund funded as quickly as possible, so you’re protected for future crises.
INSURANCE – It may be difficult right now to make adjustments to current policies, but some insurance providers are offering credits, leniency, and assistance. Check with providers for each of your different type of insurance to determine what help they can give you. If you have your insurance premiums set up on automatic payments, you’ll want to revisit those and make adjustments accordingly.
INVESTING – Whether you’re nearing retirement or not, if you’re constantly looking at your 401k or IRAs and anxious about it, my recommendation is talk to a financial investment advisor that you trust so he/she can help you understand your options and guide you in making wise investment decisions at this time.
GIVING – Whether you can give some time, some of your skills/talents, or some resources, helping others always takes the focus off of our own fears and worries and changes our perspective a bit.
Hopefully in spending time on your own personal family economy: your budget, debt reduction plan, emergency fund, insurance, and investments, as well as giving to others, much of your anxiety will be reduced and you will have set your family up to be as stable as possible for whatever comes with the national and global economy.
Do we, as parents, tie our identity to what we do rather than who we are (our BEING). My old boss of a small leadership development consulting company would always say, “we are human beings, not human doings”. Wow! Talk about shifting the mindset of a DOer/FIXer (me)!
Too often people think of themselves (and others) as “human doings” and thus attach any failed outcome to their own identity as a person and to their innate worth as a human being. This is something that each of us has to examine for ourselves to determine if we may need to shift our mindset. We also want to ensure that we don’t inflict that paradigm on our kids. If we can help our kids separate how well they do something from their identity, it will free up their energy to see failure as a key to the learning, growing, innovation process. [Here's a great list of positive words for helping you describe your child's behavior, character, or actions rather than their BEing.]
Regarding chores and allowance … after giving your kids some basic guidance on their work task or on their finances, be patient and give them some autonomy so they can work through things themselves. Allow them to experiment and falter or shine so they can test their abilities and learn.
“If you’re not failing, you’re not growing.” – H. Stanley Judd
With money, allow them to decide what they’d like to spend their “Spendable” jar cash on. Give them the freedom to exercise “opportunity cost”, so they can see firsthand that by using their money on something now means they won’t have that money later for something they may consider more important.
With chores, after showing them how to accomplish a task, like washing the kitchen floor, for example, allow them to do it “their way” and experiment on how to accomplish the task in a way that gets the job done and works well for them. When my daughter Elissa was young, she wanted to clean the laminate kitchen floor like Cinderella, so she would get a rag and a cleaning spray and sing “Sing, sweet Nightingale” while cleaning (so cute!). That slow methodical approach to cleaning the floor didn’t last because it took too long, but she figured that out for herself and changed how she did it.
By giving our kids opportunities to make their own decisions and the opportunity to “fail” and overcome disappointment, they’ll not only learn, but they’ll realize that they’re not helpless. This encourages competence, independence, and resilience in the face of frustration. And as they develop competence in jobs that they take on and in the money that they manage, they’ll do a better and better job at it and be able to take on greater responsibilities with confidence. Luke 16:10
Intentional parenting takes work, but there’s a payoff. Proverbs 22:6 says, “Train up a child in the way he should go, and when he is old he will not depart from it.”
Being paid for hard work, developing a spirit of contentment rather than entitlement, and developing accountability, independence, and confidence will all stick with our kids the rest of their lives. Learning how to be responsible for some of their financial decisions from a young age will increase their financial know-how, so when they enter adulthood they hopefully will be wise enough not to succumb to all the financial temptations that our culture has for them.
As a certified Personal Finance coach (and homeschooler of 15 years), Kathleen has worked with people of all ages, but her passion is to help kids/teens/young adults take control of their finances early, learn entrepreneurial skills, generate multiple income streams, and get on a path to Financial Hope & Freedom so they can live into their passions and purpose. (Free Webinar on how to Empower Money Smart Kids with Financial Literacy & Entrepreneurial Skills)