Economic recessions can cause financial stress leading to poor mental and physical health. It is best to take a proactive approach to your financial situation by keeping a budget, paying off debts to become debt free and building an emergency fund. If you are currently facing financial struggles it is best to consult a financial advisor or a Licensed Insolvency Trustee to review your financial situation.
Recessions are hard times for all of us. During an economic recession, people face financial distress and need to find ways to survive the economic downturn. This article will provide tips and strategies to help you manage financial stress during a recession to provide financial relief.
What is a Recession?
A recession is a period of economic decline that typically lasts for a couple of years. It is marked by a decrease in GDP (Gross Domestic Product) and an increase in unemployment. The recession is usually preceded by a period of strong economic growth and is usually followed by a period of economic recovery.
During an economic recession, consumers often reduce their spending, businesses reduce their investments, and governments reduce their spending. This leads to a decrease in economic activity, which further leads to an increase in unemployment and a decrease in GDP.
What Causes a Recession?
Recessions are usually caused by a combination of factors, including fiscal and monetary policy, international trade shocks, and changes in consumer sentiment.
Fiscal policy refers to the government's spending and taxation decisions. When the government reduces its spending or increases taxes, it can lead to a decrease in aggregate demand, which can cause a recession. Monetary policy refers to the actions of the central bank. When the central bank raises interest rates, it can lead to a decrease in aggregate demand, which can lead to a recession.
Changes in consumer sentiment can also lead to a recession. When consumers become pessimistic about the future, they may reduce their spending, leading to a decrease in economic activity.
Causes of Financial Stress During a Recession
During a recession, people often face financial distress which can affect their mental and physical health. This can be a result of decreased income, increased expenses, or both.
Decreased income is often the result of job losses or reduced hours. This can lead to a reduced ability to save, pay bills, and make investments.
Increased expenses can be a result of higher prices, which can be caused by inflation, and increased borrowing costs from higher interest rates. All of this can lead to financial stress.
The increased financial stress levels may cause people to seek out short-term solutions such as increasing their credit card debt or obtaining payday loans or personal loans which may increase their stress levels.
Strategies for Surviving a Recession
Here are some strategies to help you survive a recession:
1) Reduce Expenses
Cut your expenses to the bare minimum, which will help you save money and make ends meet, here are some ways to do this:
Cut back on non-essential spending such as dining out and entertainment.
Shop around for the best deals on groceries and other necessities. This will help reduce your expenses and save you money.
Make use of discounts, such as senior discounts, student discounts, and loyalty programs.
Cut back on transportation costs by walking, biking, or taking public transportation.
2) Increase Your Income
Look for ways to increase your income, including the following:
Request extra hours/shifts at work to increase your monthly income.
Find a second job for evenings and/or weekends. Any extra income can go long way in providing extra money in your budget for savings or paying down debts.
Sell items you no longer need through online marketplaces such as Kijiji or Craigslist.
A personal budget is the expected income and expenses for a specific period, such as a month or a year. It can help you understand how much money is available to spend and save and helps make informed good decisions about purchases. Creating a budget can help you stay on top of your income and expenses.
Consider the following for creating a budget:
Track Your Spending
Identify areas where you can cut expenses. Are you spending too much on coffee or lunches? At the end of each month compare how much you spent on groceries to dining at restaurants. If you are just tapping your card with each purchase, it can be hard to keep track of where your money went each month. Tracking your spending will help you save money and ensure all bills are paid on time.
Identify Your Needs and Wants
Needs are something you need to live such as food and shelter while your wants can be those things that help you enjoy life such as restaurants and vacations. It is best to ensure you have enough money to cover all of your needs before you start spending money on what you want to buy. This will help you prioritize spending and make informed decisions about where you spend your money.
Pay Yourself First
Every time you get paid transfer some money automatically to your savings account. Do this before you pay anyone else, which forces you to set aside a portion of your income for savings and investments. This will make it easier to save money and help you build wealth over time.
Set Financial Goals
Financial goals can be short-term for one year and long-term for 5 to 10 years. When creating financial goals you want to make a plan to reach your goals which can include setting aside some money each month toward your financial goals. Setting goals will help you stay motivated and on track with your finances.
Create an Emergency fund
An emergency fund can be money stored away for an unexpected expense. This money should be kept separate from your chequing account so you're not tempted to use it every month. It can be used to help cover unexpected expenses like a car repair or medical emergency.
4) Reduce Debts
Here are some tips to help you get out of debt:
Prioritize Debt Repayment
Prioritize debt payments with the high-interest rates first. This will help you save money in the long run, as you incur fewer interest charges each month.
Negotiate With Lenders
Negotiate with your current lenders to reduce interest rates and fees. This will help reduce the amount of interest you pay.
Make Extra Payments
Make an extra debt payment to reduce the amount of interest you pay throughout the loan and to help pay off your debt sooner. If you worked overtime or received a bonus, think about making an extra debt repayment.
5) Explore Debt Relief Options
If you are already struggling with debts, explore the following debt relief options:
Try to consolidate your high-interest debts into a loan with a lower interest rate. This will ensure more of your monthly payment goes towards paying off the principal instead of the interest. This could include consolidating your credit card debt into a line of credit or HELOC (Home Equity Line of Credit) if you own a house or a credit card debt into an unsecured line of credit.
Speak with a Licensed Insolvency Trustee about options for reducing your debts through a consumer proposal. If you find you are making monthly payments but your debt is not decreasing then this can be a great option to reduce your total debt through one monthly payment. Also, this option can help you become debt-free sooner as all your debts may be reduced and all interest charges immediately stop.
If you tried all of the above to pay off your debts and it didn't help then you could consider filing for bankruptcy by speaking with a Licensed Insolvency Trustee. This option may not be ideal but can help you clear your old debts and have a financial fresh start and become debt free.
Recessions are stressful times and it is important to manage your financial stress. The tips and strategies above can help you relieve financial stress during a recession. By following the tips outlined in this article, you will be able to make informed decisions about your finances and survive a recession.
If you would like to have a free, no-obligation consultation to discuss your financial situation and if a consumer proposal is a right option for you, we would be happy to speak with you.