Recent economic events, including two recent interest rate cuts by the Federal Reserve and a shaky stock market, have raised alarm bells that the U.S. economy may be slowing down after two years of solid economic growth. While the long-term impact of a recession is typically low, the impact on personal finances can be drastic and take years to recover.
Despite the negative economic trends, it is not time to panic. Instead, begin planning and focusing on what you can control to better live within your means. Consider taking the following steps to plan for financial uncertainty.
1). Pay Down Your Debt. One way to ensure you have the cash needed in a slowdown is to eliminate your personal debt that limits your disposable income each month. It is easy to accumulate debt in good financial times because consumers feel confident in their ability to repay their debts with future income, but when interest rates rise or incomes shrink, having those debts paid down will help you sleep better at night. If you don’t have cash to pay down your high-interest debts, consider a debt consolidation to a loan with a lower interest rate which will free up cash with lower payments; or, checking with your financial institution to see if they have any programs that can help you take control of your debt.
2). Cut unnecessary expenses. Review your monthly expenditures and look for ways to trim back any unnecessary expenses – gym memberships, personal care services (such as hair care, nails, etc.), dining out, cable/streaming services, or any expense that is not covered by your monthly income. These expenses can add up and provide a nice cushion.
3). Create a Budget – and stick to it. There are two sides of the budget equation – income and expenses. When you create a budget, you simply balance out the expenses that you pay with the money that you bring home. Being disciplined and aligning your spending and savings goals with your income is one way to make sure you have enough to make your ends meet. Living within your means during an economic downturn also ensures that you do not accumulate debt to bridge the gaps between income and expenses.
4). Make Saving Habitual. One of the best ways to temper economic uncertainty is to have money in the bank. If you are living paycheck to paycheck with no cash reserve, an economic downturn could set you back for years, but having 3-6 months of living expenses saved gives you a fallback and provides peace of mind when money is tight. Put the money you free up from reducing debt and cutting expenses to work in an interest-bearing savings account and be prepared for anything the economy throws at you.
5). Have Access to Cash. Similar to having cash reserves in your savings account, having access to cash for bigger expenses can provide peace of mind in an economic slowdown. Apply now for a home equity line-of-credit (HELOC) and use the equity in your home for access to cash in the event you have an expense that exceeds your cash reserves.
Following these steps can help you prepare for whatever life throws your way. On the one hand, if economic fears become reality, you will be prepared with a lean budget and money in the bank. On the other hand, if the economic red flags prove to be false, your personal finances are in great shape, setting you up for other financial opportunities.
KEMBA Financial Credit Union has been serving members for nearly 90 years, so we’ve seen our share of economic ups and downs. Our mission is to provide Central Ohioans with the tools, resources and advice to manage their finances every day, including weathering periods of uncertainty. If you have questions about your personal finances, our experienced KEMBA Member Service Representatives can help. You can stop into one of our Central Ohio branches, view our financial counseling resources at kemba.org, or call us at 800.282.6420, option 4.