How to Thrive During an Economic Downturn

It has been a chaotic couple of years since the beginning of the pandemic – and with the world now struggling with the effects of political instability in some countries, we are all feeling the pinch of the current economic downturn.

An economic downturn slows down business activity causing increased unemployment, volatility in investments, rising inflation, increased loan defaults etc. It generally makes managing your money more challenging.

How can you prepare, then, to not only make it through these challenging times but to thrive?

Here are seven smart steps within your control that you can take right now to effectively manage your money during (or in the months leading to) a recession to ensure you make it through thriving.

1.       Reevaluate and adjust your priorities. Your first course of action will be to take a moment to assess your current expenditure and your goals. Are there adjustments you should make? The one adjustment you will probably have to make is to reduce your expenditure by cutting out some of it. When it comes to your goals, you may have to move some of your short-term goals further out to enable you to boost your ability to save cash in the short term. Take some time to reexamine your priorities to ensure they are best serving you at the moment.

2.       Be Adaptable. During an economic downturn, you will likely face a new set of challenges than the ones you have been accustomed to. Adaptability is therefore an important skill for you to have so that you can shift your thinking and solve these new problems in a new way. During the COVID pandemic, many of us had to adjust to working from home and dealing with the challenges associated with this change. Currently, we are facing increased fuel prices and we have to adjust to managing with this change. Expect more challenges and be ready to roll with the punches to lessen the impact these hiccups will have on your life.

3.       Immediately eliminate all your high-interest debt. While you generally should avoid carrying high-interest debt, the worst possible time to have this sort of debt is in times of uncertainty. It is recommended that during an economic downturn you should try to pay down your loans – beginning with the higher interest ones. You do not want to be caught out with mounting interest payments in the event of a salary cutback or a similar unexpected blow to your income.

4.       Take this opportunity to invest in yourself. While the economy is getting tougher, a good use of your time would be to work on improving your skills. Make yourself more marketable. Work on ways you can add value to a company that would make you more of an asset to them than a liability (Which may come in handy if the time comes when they have to make cutbacks). Also work on improving skills that will help you personally – your health, interpersonal skills, money management, networking, etc.

5.       Boost your emergency fund as a precaution. Having a sizeable emergency fund will soften any unexpected hits to your income (as well as the increased cost of living). While your income is still unaffected, you should begin to put aside more towards this fund. Aim to have a fund that can cover all your necessary expenses for at least six months – more if possible. Keep in mind the fact that the economic downturn could lead to increased prices. This fund should be kept as an easy-to-liquidate asset such as a fixed deposit account in a reputable, stable bank.

6.       If possible, increase your income streams. Although creating alternative income streams may not always be easy, economic downturns often create “obstacles” that to the discerning investor can be seen as opportunities. As an example, remember how at the height of the pandemic people were selling veggies out of the back of their cars? That was innovation driven by necessity. You don’t necessarily have to do precisely that, but you can come up with creative ways to make extra cash by taking advantage of the skills you have (e.g., Baking, bookkeeping, sewing, photography, writing, singing etc.).

7.       Continue to invest, albeit conservatively. Whereas you may be tempted to stop investing altogether, a better strategy may be to review your investment allocation. It is recommended that during an economic downturn you focus on long-term, lower-risk asset classes with the intention of resuming a more aggressive investment approach when the economy stabilizes. Ensure to maintain a diversified portfolio, though. You may also notice that some of your current investments have experienced deterioration in their performance which is to be expected; avoid liquidating them now at a loss if possible.

The effects of an economic downturn are not in your control, but you can control how you prepare for tough times by taking precautionary measures and making sound financial decisions to safeguard your (and your family’s) financial security.

Stay calm, stay positive and keep your eye on your financial goals. To quote Maya Angelou, “Every storm runs out of rain.”