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According to experts, a recession in Canada is still a possibility. This is a cause for concern, but there are ways to protect your personal finances. Here are 10 tips to help you prepare for the impact of inflation and an economic recession.
Here is a summary of how you can prepare for a recession:Take action
A recession can be defined as follows: a decline in a country’s gross domestic product (GDP) over at least two consecutive quarters or a shrink in GDP over six months.
The impacts of an economic recession include higher unemployment and a slowdown in business growth. A recession can be a difficult experience, generally lasting between six and twelve months. Let’s not forget that a recession is not the same as an economic depression (like the Great Depression during the 1930s).
When this kind of economic situation is on the horizon, it’s natural to be concerned. However, don’t forget that you can take certain financial steps to prepare and get through it without too much damage.
The first thing you should do is make changes to how you’ve managed your finances so far. If you’ve accumulated debt, now’s the time to adopt good financial habits and get back on track.
Regardless of whether a recession is looming, the first step in properly managing your finances is living within your means. We all have a tendency to buy items that we don’t need. During an economic recession, learning to tighten your belt and cut out unnecessary expenses is a smart move. Instead of going out to restaurants, prepare your own meals as often as possible. Take your holidays in Quebec and aim for simplicity. Make do with what you already have. For example, rather than buying a new car, have your current one repaired. Put off renovating your kitchen or bathroom. These projects can wait until next year.
As you already know, there are “good” and bad debts. For example, your mortgage is considered “good debt.” On the other hand, credit card debt is one of the worst debts since it carries the highest interest rates (often around 20%). During normal times and especially during an economic recession, you should prioritize reducing your credit card debt.
Don’t hesitate to contact your financial institution and find out whether you can get a lower rate or if you can use a personal loan with a lower interest rate to pay your debt. Where possible, make cash payments instead of using your credit card. In this way, you won’t overspend or get into debt. In any case, this is a good habit to adopt over the long term.
Regardless of the economic situation, making a monthly budget is an excellent way to properly manage your finances and see where you stand. Use our free online budgeting tool or an Excel spreadsheet to list all your income sources and expenses and see where you can cut back (online movie subscriptions, entertainment, etc.). Renegotiate your insurance policies (life, care, home, etc.). You’ll be surprised to see how much prices vary from one company to another.
By creating a well-defined personal or family budget, you’ll gradually regain control over your finances and you can make changes when needed.
Whether or not there’s a recession, building up an emergency fund to deal with unexpected events is always a good idea. This will save you from paying interest fees or getting further into debt in the event of an unforeseen expense. As a rule, you should set aside three months of expenses. Deposit the money in a high-interest savings account.
Also, instead of making additional payments on long-term debt with a lower interest rate such as your mortgage or car loan, reduce these payments and add the money to your emergency fund.
If you already have debts, discuss all your options with your financial advisor before borrowing money. However, if you have no choice but to take out a loan, borrow only what you need and take time to compare the various interest rates.
With inflation, grocery shopping costs more so you have less money at the end of the month. However, you should still try to pay all your bills on time. If this isn’t possible, make the minimum payment and contact your service providers. Certain providers may offer you a payment plan spread out over several months.
Businesses also feel the squeeze during a recession and are often forced to cut bonuses and salary increases. Therefore, when you’re drawing up a monthly budget, don’t bank on higher income this year.
If you receive unemployment benefit payments, set money aside for paying taxes because the amounts allocated to you are taxable. This will help you avoid unpleasant surprises.
If you have spare time on evenings or weekends, try taking on a little extra work to help you make ends meet every month.
Above all, bear in mind that your hard work will pay off! Recessions are a normal part of the economic cycle and they don’t last forever. Once you’ve learned to make a budget, manage your credit card debt and reduce your spending, you’ll have good financial habits for life. And if you ever feel that you can’t weather the storm, contact one of our licensed insolvency trustees. They can help you build a strong financial plan and find ways to reduce your debt.
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