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How to survive a recession: A guide for making the most of your money during a difficult time

Rounding it up

  • A recession is a period of two or more consecutive quarters where the economy shrinks rather than grows. We are likely entering a recession right now.

  • Fortunately, there are ways to mitigate recession-related damages to your finances — like managing any and all debt you may have.

  • You should also create a spending plan; set it up so you can pay your bills and make debt repayment commitments while having some wiggle room in case you need it.

  • When the economy is less than bustling, it’s crucial to build a slush fund and contribute to your longer term savings goal for when the recession ends (and don’t worry, it will end).

12 min read

Emily Keeler

Times, as you know, are tough right now. COVID-19 has brought a lot of sudden change, confusion, and difficulty. Newspapers, podcasters, and other media are suggesting we’re heading into an economic recession. It’s frightening. But there are definitely things you can do to help mitigate the damage to your personal finances. Whatever the storm, below are the best tips to weather it.

What is a recession?

A recession is a period of two or more consecutive quarters where the economy shrinks rather than grows. This is called ‘negative growth.’ Recessions can be triggered by things like a sudden change in oil prices, or a crisis of confidence in the market—that’s what happened in the 1990s with the dot-com bubble.

Right now, it seems very, very likely that we are entering a recession. While it’s hard to know for sure what is going to happen with the economy in the coming months, there are a few things to keep in mind to help you find a little more balance in your financial life, whatever it looks like.

What you can do

The first thing to do is to let go of any judgement you might have about the way you’ve handled money in the past. Don’t beat yourself up for not being prepared enough. Focus instead on what you can do now, today, to build up the financial habits that will help carry you through this period.

Truthfully, managing your money during a recession is very similar to managing your money in even the best bull market. It might be much (MUCH) less fun during a recession, but the basic principles are all in place. There is no time like the present to check in with your financial habits and cultivate a sense of power and control of your financial life.

We’re breaking these habits down into three categories —managing debt, making a plan for spending, and managing your savings and investments. Most of our tips are good to have anytime, but some are more specifically geared toward pulling through this difficult period.

During a recession, where cash flow might be tight and your goals might shift, it’s important to remember to practice patience and kindness with yourself. Things are hard enough—it’s not helpful to be mean to yourself (or others). Let’s rip the proverbial bandaid off and start with the ugliest part.

How to handle debt in a recession

Everyone intuitively understands that there are good debts and not-so-good debts to carry. Your mortgage, if you have one, is usually considered the best kind of debt. Credit card debt is definitely the bad kind.

In general, and especially during a recession, the quickest way to tackle debt is to minimize the most expensive debt first. Typically, that means credit card debt.

Credit Card debt

Credit card debt is some of the most expensive debt there is. Each month, you’re charged around 20% interest on whatever balance you’re carrying. It’s not pretty. Getting rid of credit card debt is a major priority.

That’s easier said than done, of course—especially when people may be living on a reduced income. Even before the pandemic hit, Canadians were carrying a collective credit card debt of over $100 Billion. That’s an all time high.

The first thing to do to manage your credit card debt is look at your balance. If you’re paying interest every month, you can call your credit card company to see if you qualify for lowering the rate you’re paying. You can also try to negotiate a payment plan for paying off the balance. In the wake of the pandemic, many banking institutions are temporarily lowering the interest rates on credit card debt, though you may be asked to complete a financial review.

Depending on how much debt you’re carrying, it may be wise to see what your financial institution can offer you in terms of a personal line of credit or home equity loan. Transferring your debt load to an account with a much lower interest rate can create a little more breathing room for you to make payments and prioritize savings.

And of course, there is no time like the present to stop reaching for your credit card. You could even consider locking it. Try to switch recurring payments from your credit card to another account. (KOHO prepaid Visas, for example, work everywhere Visa does.) Trying to get in the habit of using money you already have—rather than using credit—is always worth it.

You can unlock your credit card any time you really need to, and it’s certainly comforting to have access to credit in case of emergencies. However, and I’m speaking from personal experience here...sometimes it’s easy to forget, after doing a little online browsing, that those limited edition sneakers are not an emergency.

To be clear, there is absolutely no shame in carrying credit card debt. You’re certainly not alone. It’s never too late to learn how to find a sense of balance and control with your finances. It might be tough, but it’s definitely not hopeless. We’ll have more to say about this a little further down, when we talk about spending during a recession.

Student debt

Because of the pandemic, the Federal Government will not be applying interest on any outstanding student loans from March 2020 until September 2020. You are also not obligated to make any payments on your student loans until then. There is literally no penalty, so do not worry about it!

In fact, if you’ve been making loan payments and are earning wages or a salary, it might be a good idea to use the money you usually pay down your loan with to build up your emergency fund or pay down any higher interest debts.

"Transferring your debt load to an account with a much lower interest rate can create a little more breathing room for you to make payments and prioritize savings."

Your mortgage, personal Line of Credit or Home Equity Line of Credit

Depending on which financial institution you’re working with, you might have more options than you think for figuring out payment terms. For the most part, financial institutions are following the lead of the Bank of Canada, which has significantly cut the policy interest rate. Call your financial institution to see if you’re getting the lowest possible interest rate on your debts, and to work out a manageable payment plan.

Unmanageable debt

If debt has you completely snowed under, it can feel very, very scary. It’s psychologically taxing to walk around with that much money worry. It’s hard, but it’s not hopeless. If you’re struggling to pay down the debt you’ve accumulated, take a peek at our guide for paying off your debt when it feels impossible.

How to spend your money in a recession

Especially if you’re living on a reduced income, it’s tempting to panic and start pinching every proverbial penny. With bills coming in, the fact that you need caloric sustenance to survive, and a place to live, it’s easy to feel squeezed in multiple directions.

But with a solid, flexible spending plan, you’ll be in a position to create a sense of control over your financial life. Having a plan keeps the ball in your court, letting you find the wiggle room to juggle things around if it’s necessary.

And, importantly, making a spending plan will help combat money anxiety, giving you a little more mental space to, y’know, live your life. Lean into the fact that the spending plan is supposed to help you find a sense of chill and control. Be realistic and clear headed when you make your plan— remember, the point is NOT to cut out everything that brings you joy. Start by looking at your income, and look at what your expenses usually are, and make tweaks and adjustments from there.

Being mindful about your expenses, alongside avoiding carrying high-interest debt, are the absolute best ways to weather a recession.

Create a spending plan

Okay, so you’ve probably already noticed we’re calling this a spending plan, not a budget. Why? Because, unless you’re making a movie about, say, Captain Marvel, using the word “budget” is just a straight up bummer. It sounds so restrictive—it’s so often preceded by the word “tight.” We’re not talking about making a brutal set of limits to bum you out. We’re talking about a tool to make you feel on top of your financial decisions. Something that actually helps you find a little extra wiggle room if you need it.

The first step to creating a spending plan is to look at your regular income. If you’re in the gig or freelance economy, or working with a variable income, you might consider averaging out how much you make per month and starting from there.

Look at what you’re taking in, and then look at the regular expenses you have. Things like rent or mortgage payments, your phone and internet bills, yes, but also things like your Netflix and Spotify subscriptions, anything you’re paying month to month. There are a lot of ways to build a spending plan—you can track your spending as loosely or tightly as you want, through a spreadsheet or through, for instance, KOHO’s categories. Not to bring up the ‘B’ word but KOHO’s ultimate budget template is really handy for this.

And of course, there are a few basic strategies you can use to reign in your spending.

Start with the things you’re automatically spending money on that don’t actually make your life better, or align with your values. Set up some time in your calendar to go through your subscriptions and cancel all the ones you’re not actively using (sorry, Duolingo Pro). Do you need both Netflix and Hulu? Can you split a team Spotify account with someone instead of paying for two seperate ones? You can start using money that was being billed each month to automatically build your slush fund or apply it to your high interest debts.

Chances are good you’re not spending a ton of money on eating out right now. But are you Uber Eats-ing three nights a week? It might be worth it to do a little more planning ahead for feeding yourself. Make it easier on yourself by having food you like on hand and ready to go, plus make sure to stock the freezer with some super quick options for nights when Uber Eats seems way too easy. (I like frozen pierogies!).

That said, it’s important to remember that you’re using the spending plan to set yourself up right for the long term, and to make sure the way you spend and save your money aligns with the life you want to be living—not just in the future, but now, too. If you make your plan too restrictive and punishing, you’ll be miserable! And that’s not the goal.

Find the things that really do make you feel good—that’s high value. Maybe you can plan to buy the truly life-affirming single-origin coffee beans for your morning chemex, if that’s your bag, and reduce your grocery spend a little to compensate. (Pierogies, by the way, are cheap as heck!)

It can be a bit awkward at first, but building habits that make it easier to take care of yourself (and your finances) helps take the sting out. Reducing expenses and paying down expensive debt are the primary tools you have to come out the other side of a recession.

Things may get bad, and you might need to take on more debt. That’s normal, and absolutely not shameful. The most important thing you can do is focus on keeping your expenses under control, and try to avoid high interest debt.

"Being mindful about your expenses, alongside avoiding carrying high-interest debt, are the absolute best ways to weather a recession."

Paying your bills

Try to make the minimum payments, and on time. If it’s not possible (and sometimes it’s not), it’s wise to call ahead and let whoever you’re paying know. In fact, some of the companies might be a little more flexible than usual on creating manageable payment plans. Many creditors will negotiate with you—it’s in their best interest to make it easy and possible for you to pay them, after all.

Paying yourself

Setting yourself up for the post-recession future comes down to paying yourself. Make sure your spending plan accounts for your savings and debt repayment commitments, even if you’re working with less than your ideal level of income. You can even make it automatic, with KOHO’s Goals and RoundUps.

How to save during a recession

No one can truly predict the future, but there are important things you can do to prepare for whatever is coming down the pipe. Recessions don’t last forever—that’s one of their defining features. The future holds many surprises, both the good and not so good kind. But setting yourself up to navigate uncharted waters will help you stay afloat, no matter what’s coming.

The biggest priority for your financial health depends on a few factors, like where you’re at in life (planning for your own university graduation looks a little different than planning for your kids to graduate, for example). But there are a few things to keep in mind for pretty much everyone, especially during a recession.

Slush fund

It’s always a good idea, but when the economy is less than bustling, it’s crucial to have a slush fund. When the proverbial rainy days come, having enough saved up to cover your expenses for a while is the best umbrella. That way, you can handle emergencies and difficulties without paying interest or taking on more debt.

Building up (and, potentially, rebuilding) your slush fund should be your top priority. Aim to stash away six months to a year of your day-to day expenses —basics like your bills, groceries, and rent or your mortgage payments, yes, but also the fun stuff! You want to keep this money somewhere super accessible, in case of, well, an emergency. While a high interest savings account might make sense, you definitely want to avoid storing this money in anything fixed term, and steer clear of accounts with cumbersome withdrawal penalties.

Automatic savings plans, like KOHO Goals, can make it super easy to save up your slush fund.

"Building up (and, potentially, rebuilding) your slush fund should be your top priority."

Longer term savings and investments

Recessions end. The economy will shift and change. If you’re in a position to continue contributing to your longer term savings goals, you should absolutely continue to do so. There will be a time when you’ll be glad you did so.

Yes, fluctuating interest rates might make savings less rewarding than during ideal circumstances, and a sluggish economy typically means lower initial returns on investments, try to remember that you’re playing a long game here. A lonnnnnnnng game. Tinkering with your portfolio to try and respond to every market dip and bump is a fool’s errand. It might feel satisfying to take action, but sometimes sitting it out is the wisest course.

If you’re concerned, it might be worth it to talk to your financial coach (KOHO Premium users get free coaching, just saying) or an investment adviser about your options. Given the economic fluctuations that accompany a recession and its recovery, it generally pays to play it cool, and to avoid rash decisions.

Remember, recessions end

Being mindful about your spending, saving, and debt management is the best strategy for coming out the other end of a recession with minimal damage to your financial health. Finding a sense of balance, even amid uncertainty, is a good skill to sharpen any old time.

When the recession ends, learning how to mindfully manage debt, work with a sound and flexible spending plan, and building up the habit of saving will pay off for the rest of your life. In the meantime, learning to be patient and kind with yourself as you fortify your financial habits is important.

Creating a sense of clarity around what you’re spending, what you’re saving, and being extra mindful about the costs of carrying debt are the best tools you have for achieving a sense of balance in your financial life, no matter what the market throws at you.

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