Wednesday, October 5, 2011

Manage Your Finances in Recession: Tips to Survive

Often the focus of your finances is on what you can be doing to make them grow, make them stronger and make them work harder for you. However, in a recession, you also need to be aware of the external forces which can affect your financial stability and which are out of your control. Knowing that interest rates will be fluctuating, job security will be fragile and credit will be hard to get can help you manage your finances and make changes which are within your control, to survive. 

To manage your finances in a recession you need these tips: 

    * Clear high interest debts. In a recession your high interest debts should be your highest priority and you should focus on paying them off as soon as you can. Your high interest debts are taking a big chunk of your budget each and every month and if money became tighter or if you lost your job, you would struggle to meet those high interest payments.

    * Over pay your mortgage. The last thing you want to have to do in a recession is sell your house, firstly because you want to maintain some stability for your family, and secondly because house prices plummet in a recession and you won’t get anywhere near the true value of your home. Therefore, protect your most important asset by making over payments into your mortgage. You can set up a direct debit of a higher amount each month, or you can simply deposit extra amounts into your account as they come in from cash birthday gifts or a tax refund for example. Getting ahead on your mortgage also gives you room in case you can’t meet your repayments for a few months.

    * Consolidate credit card debt. When you have a number of credit cards they will all be at different interest rates and as time get tougher during a recession you risk these providers increasing their interest rates. By consolidating your credit cards into a personal loan or taking advantage of a low interest balance transfer offer you can lock in a lower interest rate, and make just one monthly repayment.

    * Don’t take on more debt. With interest rates so low it can be tempting to take out new debts, but this doesn't make financial sense during a recession. Even spending on your existing credit cards is decreasing your financial stability in an already unstable time, and adding to your monthly outgoing costs.

    * The benefits of a variable rate mortgage. During a recession interest rates will drop in an attempt to stimulate spending. However, if you are on a fixed rate mortgage you can’t take advantage of this. Therefore, look at how much it will cost to break your fixed rate term and start paying less interest.

    * De-clutter your life. When money is tight it is time to look at what’s really important, and get rid of everything that’s not. Plus, clearing out your home of all the things you don’t need to want anymore is a great way to make some extra money. Put your unwanted items on eBay or set up a garage sale, as a recession is a perfect time to be selling off your unwanted items, as many families are looking to buy, but can’t afford to buy new, so will come to you.

    * Find ways to save. Now is the time to look at the difference between what you need and what you want and consider where you really need to be spending your money. Look for ways you can cut back on your mobile plans, cancel your gym membership, take your coffee and lunch from home and stop eating out or ordering take away so much.

    * Stop eating junk food. Buying junk foods, snack foods and soft drinks is expensive, especially when they are being consumed by the whole family. Therefore, during a recession, take the relatively small step and swap out your junk food for fruit, muesli bars, water and juice. You’ll not only save money but you’ll also feel better for the change. Junk foods are high in sugar, salt and fat, and in financially unstable times you can’t afford to get sick. If you look after your health you’ll be able to perform better at work, you’ll be able to cut back on doctor’s bills and medications, and living a healthier lifestyle will also make your life insurance and health insurance premiums more affordable, so that you can afford to protect your family from the worst, even in the worst of times.

    * Save what you can. After you have your debts under control and you have created a buffer on your mortgage repayments, look at putting any extra you have into a savings plan. Savings are of course important, but in a recession if you have high interest debts, you’re going to be paying more in interest than you are earning in interest on your savings, and having fewer bills is an important way to survive.

    * Look after your job. Many companies will look at cutting back on staff during a recession but there are ways you can try to survive the cut backs. Firstly make sure you continue to work hard and you are adding real value to the company. At the same time, be prepared in case you are laid off, with an up to date résumé, a list of contacts and a strong network. You may even want to start a business on the side as any extra cash coming in can help you survive. 

As a personal finance writer, Alban likes to share his advice online. When he is not contributing, Alban is a personal laon reviewer at Personal Loan Finder.

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