How To Budget for a Possible Recession

How To Manage a Budget Amid Recession Fears

The thought of an economic downturn can feel like something that’s completely out of our control. While we can’t prevent a recession from happening, we can take steps to be prepared. Learn about how to adjust your budget for inflation with American Financial Solutions.

Gain control of your finances with a budget

First things first: if you don’t have a monthly budget, you should set one up right away. Without knowing how much you spend and earn, you won’t be able to get your finances under control.

Start by calculating your take-home pay. Then write down all your monthly expenses, like your rent or mortgage, gas, groceries, utility bills, and any student loan or car payments. Note your discretionary spending, too: how much are you spending on things like entertainment, going out to eat, or buying new clothes?

Using an online budgeting tool can help you track all your income and expenses so that you can understand your debt, identify areas where you can save money, and live within your budget.

Adjust your budget for inflation

Once you have a family budget plan in place, you’ll know exactly how much money you can allocate for regular expenses, savings, debt payments, and the occasional treat. Because higher inflation often precedes a recession, you’ll need to be ready to adjust your spending accordingly.

What is inflation & how does it affect my finances?

During a recession, the cost of goods and services can gradually inch up. Inflation decreases our purchasing power: your grocery bill might be more expensive than it was a couple of months ago, even though you’re getting the same items.

In the United States, inflation is often measured in the context of the Consumer Price Index (CPI), created by the Bureau of Labor Statistics. The CPI measures the monthly change in prices that U.S. consumers pay for thousands of common goods and services – everything from medical care to food to housing costs.

Ways to save money during a recession

Even as prices of everyday items increase, it’s possible to reduce your expenses – and even build up your savings – during a recession.

What is a recession & how does it affect my finances?

In simple terms, a recession is a decline in economic activity. National Bureau of Economic Research defines a recession as a downturn that is widespread throughout the economy, lasts more than a few months, and affects the gross domestic product, income, employment, industrial production, and retail sales.

The gross domestic product (GDP) is a measure of the value of goods and services produced and sold by a country, indicating the overall health of the economy. Many economists agree that two consecutive quarters of declining U.S. GDP indicate a recession.

Because unemployment can increase and incomes can stagnate during a recession, your finances can be negatively affected. It may be more difficult to reduce debt or save money during a recession. Fortunately, there are steps you can take to manage your spending.

Change your shopping behaviors

You and your family need to eat healthily, of course, but you can certainly find cost savings at the supermarket. When you shop for groceries, go with a list and stick to it.

Avoid high-ticket items like prepared foods and alcohol. Compare prices: often, a store’s in-house line is cheaper than big-name brands. And never grocery shop on an empty stomach – you’ll end up making impulse purchases.

Adjust your shopping budget

Unfortunately, a recession can also mean layoffs, furloughs, or reductions in hours. Cutting expenses can help you be prepared for a potential loss of income.

Once you’re following a monthly budget, you’ll be better able to track your day-to-day spending habits. Look at your discretionary spending and identify areas where you can make cuts. Can you eliminate one of your streaming services or spend less on clothes or takeout?

Buy less, less often

If you’re heading to the supermarket several times a week, it’s easy to fill up your fridge and end up wasting food without meaning to. Stick to shopping once a week and only buy what you need. Making a meal plan is a great way to ensure that you use up all the groceries you buy.

Consider changing stores

Your favorite gourmet grocery store might be conveniently located, but it may not have the best prices. Look through the weekly ads in your Sunday paper to find the best deals on groceries.

If you need new clothes, try shopping at secondhand or consignment stores before heading to the mall. You’ll be surprised at what you can find: clothing, shoes, and accessories will all be priced much lower than retail.

Save money through our Debt Management Plan

For over 20 years, American Financial Solutions has been committed to helping individuals and families with credit counseling and financial education. Our certified credit counselors offer comprehensive support to help you create a debt management plan, develop a budget, and set your financial goals for the future. A non-profit agency, American Financial Solutions is a member of the National Foundation for Credit Counseling. 

Get started for more information or contact us today.

Published Nov 16, 2022.