Many Canadians, and Albertans in particular, have been caught off guard by the sudden drop in oil prices we’ve been experiencing in recent months. The truth is, however, that everything that goes up, must come down. Living in a boom and bust economy, we get to enjoy the benefits of the boom times, but must be prepared for the busts as well, because whether we like it or not, the bust times do come. So what happens to our budgets when financial times take a turn for the worse? If you want to create a budget that will take you through not only the good times, but the tougher times as well, follow these 10 “recession-proofing” tips to ensure you’re prepared to face any economic uncertainties in years to come.
1. Start Small
Creating a recession-proof budget may sound like a daunting task, so the best way to start is simply to start small, with things you can easily control. This may be as simple as spending less money on going out for coffee, or could be something large like selling a secondary vehicle and focusing on carpooling and more active forms of transportation.
2. Establish an Emergency Fund
The biggest key to “weathering the storm” is to have a healthy nest egg to fall back on; you want to always be prepared for a four to six month slowdown in work in case that time should ever come. Rather than shooting for high investment returns with your rainy day fund, however, you should keep this money in a high-yield savings account where the money will be available quickly when you need it. It’s also a good idea to consider combining this fund with a Tax Free Savings Account to avoid paying tax on your interest earnings.
3. Use Cash
There are many great budgeting tools out there, but one method that has been proven time and time again is to simply use cash for all of your purchases rather than credit cards. This way, you know exactly how much you have available for each portion of your budget every month, and you can’t overspend in one area, even if you want to.
4. Reduce, Reuse, Recycle
Along with using cash, another simple but proven money-saving technique is to follow the old adage of: reduce, reuse recycle. For tips on how to save money by paying attention to the “three R’s,” refer to our article on How Money-Saving Habits have Evolved Since our Grandparents’ Generation.
5. Get Your Debt Payments Under Control
As we’ve discussed on the blog before, debt is one of the biggest financial issues facing Albertans today. Typically when bust times come, debt is the first place where most people start to get in real trouble.
Ideally, you’ll want to pay down as much debt as you can when financial times are good; that way you’ll face less of a crunch when the tough times hit. However, if recession times come and you find that your monthly debt payments are becoming unmanageable, there are a few other options to consider, which we’ll walk you through below.
6. Convert High-Interest Debt to Low-Interest Debt
One option for getting your debt under control is to transfer some of your high-interest, unsecured debt to a more manageable form of debt, such as your mortgage.
“Take that high-interest debt and put it into a low-interest mortgage,” says Gianni D’Andrea, Mortgage Broker at First Foundation. “See if you can get it all under one umbrella.”
One way to leverage your mortgage is to talk to your lender and see if you can stretch out your payments by extending your amortization. This will allow you to free up more cashflow to help you pay down high-interest debts. By leveraging your mortgage to pay off debts like credit cards and car loans, you can make your monthly payments more manageable and lower the amount of interest you have to pay.
7. Evaluate Your Mortgage
Another way to leverage your mortgage to help you save money is to consider switching to a new mortgage provider to secure a lower interest rate. D’Andrea says that even though you may face penalties for breaking a mortgage contract early, it may be worth it if you can secure a significantly lower interest rate. And right now, with rates hitting some of the lowest prices in history, talking to a mortgage advisor about making the switch could help you save a fair amount of money. As D’Andrea puts it: “This is going to be the mortgage interest rate that you’re probably going to talk about for the rest of your life.”
For more information on how you can save money on your mortgage, talk to the mortgage experts at First Foundation.
8. Evaluate Your Investments
Many people don’t realize until a recession hits that their investments are misallocated. You may have all your money in stocks, for example, and not realize the danger of this until the stock market starts to drop. A second opinion from a financial expert can go a long way towards ensuring your investment portfolio is diversified and not too risky.
Also, rather than selling off investments when the economy takes a hit like most people do, it’s actually a good idea to invest when prices are low if you can afford to do so. This could lead to a much bigger payoff in the long run.
9. Track Everything
Not sure where to start with your recession-proof budget? Track your expenses for a month or two, and you’ll get a good idea of which parts of your budget are on track, and which could use adjustment. Update your debt totals monthly, and get all of your assets laid out with an accurate net worth statement.
10. Talk to a Professional
Once you have all of this information down on paper, a professional financial planner can help you identify areas where you can do more with your money. A Certified Financial Planner can help you determine which financial services will be best for your specific situation. These could include services such as a cashflow plan, debt consolidation, or a comprehensive financial plan.
For more information about which financial services are right for you, contact First Foundation today.
In the end, you never really know how long a recession is going to last, so it’s best to take control of your own financial situation, rather than waiting for the economy to go your way. You may not be able to escape every economic downturn totally unscathed, but with some careful planning, you’ll be able to ensure that you always stay financially stable, no matter what comes your way.