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How to Financially Prepare for an Economic Downturn
An economic downturn can be scary for many. But the reality is that economic downturns occur periodically as the economic environment needs to cool down. When the economy is strong and growing, that pushes financial factors like inflation to an often-uncomfortable point.
With the rising costs that comes with inflation, a slowdown in economic growth—such as a recession—can help bring those costs down. This cycle of expanding and contracting is par for the course for the U.S. economy.
These aspects create some warranted worry. However, there are steps you can take to prepare your financial life before an economic downturn takes place:
- Check In with Your Cash Flow-One of the best first steps anyone can take as they prepare for an economic downturn is to evaluate cash flow. This means looking at the money coming in and money going out.
- Build a Budget-Having a budget is just as important as understanding cash flow. A general guideline is to spend 50% of your income on needs like housing, utilities, and food. The next 30% of income is meant to be used on extra expenses, such as traveling, entertainment, or dining out. Then, 20% of income can be used for savings and paying off debts.
- Focus on Savings-Along with adjusting expenses as needed, focusing on savings is beneficial. Experts suggest setting aside at least three to six months’ worth of expenses as emergency savings. This emergency fund can help cover unexpected bills or big-ticket items that inevitably come up.
- Eliminate High-Interest Debt-If possible, paying more toward high-interest debts can bring down a balance much faster than paying the minimum. Along with this, it may be helpful to review cash flow to see what is available for debt repayment and whether you can make high-interest debt a priority item in your budget.
- Consider Lifestyle Changes-To prepare for potential lifestyle adjustments, consider what can be done now. For instance, if housing costs are eating up a majority of your total earnings, evaluating alternatives may be worth it.
An economic downturn is an inevitable part of life, but it doesn’t have to be an uncomfortable experience. Instead, you can prepare now by adjusting your financial life as needed. It’s best to start with cash flow to ensure your earnings exceed your spending.
For more information on understanding economic downturn, access the full article here.
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