Economic crises such as the dot com bubble in 2001, the financial crisis of 2007-2007, and COVID-19 are difficult to predict. In the future, there will be more crises including financial and market crashes, bubble crashes, environmental and geographical crises, and more. These crises bring various side effects such as high unemployment and a downturn in global financial markets. Therefore, it’s important to prepare ahead of time to reduce the financial impact and stress of these events. However, only 60% of US households had enough cash on hand to cover a $400 unexpected expense before the COVID-19 financial crisis and would need to put the expense on a credit card, borrow from family or friends, or sell something they owned. The following tips will help you prepare for a financial crisis and economic events so you have sufficient cash on hand to cover unexpected expenses.
How to Prepare for a Financial Crisis
Maximize your liquid savings
Checking accounts, savings accounts, money market accounts, short-term government investments, and other liquid assets are the most useful in a crisis since you can take money out without incurring a loss.
Prepare a budget
It’s important to know how much money you have and will need in a financial emergency. A budget is a useful tool to know how much money is coming in and going out, as well as how much you’ll need in an emergency fund.
Minimize monthly bills
It can be helpful to cut unnecessary expenses from your budget to prepare for an economic crisis. If you’re able to lower monthly recurring bills, you’ll find it easier to pay them during a crisis. Start by looking at your budget to see where you’re spending more than necessary, such as paying for a landline or cable that you never use.
Pay off as much debt as possible
Create a plan for paying off your debt as soon as the last thing you want is to worry about paying off debt in a bad economy. Start by focusing on high-interest debt to save money in interest payments.
Create multiple income streams
Consider selling possessions you no longer use, freelancing, or getting a second job to earn some supplemental income. Creating multiple income streams acts as a buffer in case you lose a source of income and ensures you have more coming in during a crisis.
Pay your bills on time
During a job loss crisis you should be extra careful to pay bills on time in order to save a lot of money on late fees and finance charges.
Start an emergency fund
In a recession, an emergency fund can help you avoid becoming financially over-extended or having to leverage debt to get by. To get started, put aside 3-6 months of living expenses in an emergency account to get by if you become unemployed.
Diversify your investments
Ensure your investments are diversified across multiple industries and areas, so if one sector experiences a decline, you don’t risk sinking your entire portfolio.
Increase your credit score
During a financial crisis, you may need to take out a loan to get by. Therefore, try increasing your credit score to prepare and improve your payment terms should you need to issue some debt. The process of increasing your credit score can take some time, so it’s important to start thinking about it now before a crisis hits.
Automate your savings
To make sure you save money each month, consider automating a transfer from your checking to savings account every time you get paid.
Carefully Consider Large Purchases
Before purchasing large ticket items that depreciate in value, such as a car and technology purchases, reconsider the necessity of these items and if it’s the right time. For each sizable purchase, think about its ROI, if you can really afford it at this time, and how purchasing it could impact you financially if an economic crisis occurred tomorrow.
Although it is difficult to predict a financial crisis, preparation can lessen the impact and reduce your losses in the case of an emergency. Following the tips outlined in this article can help you prepare and plan for the unexpected so that you can be in a better position to deal with these events.
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