How to Re-Imagine Your Disposable Income During a Recession
The biggest threat to your finances during a recession is a reduction or loss of income. Seemingly disposable income now may be a lifeline to keep you from eviction, foreclosure, or repossession. So if you’re doing okay right now, it’s a good time to fortify your financial foundation. If anything in your financial picture changes, you’ll have a strong enough financial foundation so you don’t fall through the floor with a drop income.
Look at your disposable income and see how you can fill in financial gaps that can wreak havoc with your future.
Build Up Your Emergency Savings
The first job of disposable income is to act as a safety net to help you pay for what I call the Quad of Survival. These are essential expenses, such as:
When there is instability, your priority is saving. Your goal should be to save at least three months of expenses to cover the unexpected. If you aren’t sure how much you spend in a month, go on your bank’s website and review your expenses over the last three months. Divide the total number by three, and use that number as your starting point. You can re-adjust over time. I know this number may seem impossible, but it’s not. It’s starting small. Even if all you can do is $25 a month, you are now $25 a month closer to your goal. SaverLife has a lot of great free resources to help you save.
Rethink Major Purchases
If you’re considering buying a home or a car, think about how you can continue to pay your home or car payment if your income is lost or reduced. You may need to postpone or significantly lower your purchase amount to an amount you can afford for a few months if you lost your job or had a reduction in income.
Revisit Your Budget
Your budget is how you’ve chosen to spend your monthly income. When you face a potential drop in income, carefully review your expenses, separating your needs from your wants. I found it wasn’t the significant $1,000 expenses that hurt someone financially; it was the $1, $5, and $10 purchases that slowly dug a hole in their finances.
Reduce and Pay Down Debt
If you have money saved and are sticking to a monthly budget, consider using some of your disposable income to reduce debt. Paying down your debt lowers your expenses, meaning you need less money to cover costs if you experience a drop in income. Please note: If you face a pending layoff or significant income cut, then your #1 goal is to boost your savings, not accelerate your debt payoffs.
Re-imaging your disposable income in a recession comes down to timeless financial principles: saving, budgeting, and paying off debt. The key is consistency. The more you follow sound financial principles, the easier it becomes to deal with the unexpected, and the quicker you can bounce back from financial hardships.