It has become increasingly common on social media to see posts on the continuing high cost of living and the prospect of an economic recession. In some instances, comparisons are being made between food prices six months or even a year ago, and what they are these days. Depending on the product and your location, a price jump of 30% or more is not uncommon, and it is anticipated to rise even higher before the end of the year.

With all of this talk of growing inflation and an anticipated recession, it is easy to feel like a sitting duck, helpless in what is going on around you. However, even though these challenges might be inevitable, there are some things you can do to be better prepared and to come out a little less worse for wear on the other side.

 

1.  Live Within Your Means

Although this point is arguably obvious, it merits mentioning and is at the top of the list. In ensuring that you are living within your means, that is that you live within your budget, and are exercising good financial hygiene, the odds are you will be in a better position to manage as prices increase.

To varying degrees, some of us have been able to engage in a generous amount of discretionary spending, that is things you can live without. Ideally, no more than 30% of your net income should be spent on discretionary items. Do go back to basics and identify your essential and discretionary expenses, and be prepared to dial back on the latter starting from now. Should it become necessary, the money for those discretionary items could be reallocated for other priority necessities.

 

2.  Aggressively Manage Current Debt

With living expenses increasing virtually month-to-month these days, it is becoming increasingly important to manage all of your expenses generally, and more specifically your debt. So high-interest debt payments, such as for credit cards, or even for goods bought on hire-purchase, need to be aggressively managed.

Consider ways of accelerating the payments, and freeing up those funds, which can then be reallocated in your budget, or ideally to supplement your emergency savings, or be used for investing. The point is to try to eliminate high-interest debt in the first instance to improve your financial position, and thereafter to reassess your financial situation and how best to proceed.

 

3.  Create Additional Revenue Streams

A few months ago, we gave 5 Reasons Why You May Need A Side Hustle, and the very first reason was that a single source of income may not be enough. As prices increase, there are only so many budget cuts that you can do, and there may come a point where your current income is inadequate to cover your essential expenses.

It is also important to remember that with the cost of living and the cost of doing business increasing, job security may not be as assured as it had been in the past. Hence seeking at least a second income stream, be it active and/or passive income, ought to be actively pursued.

 

4.  Bulk Up Your Emergency Savings

As part of good budgeting, you are encouraged to have an emergency fund, which most financial experts recommend ought to cover between three to six months’ worth of expenses. However, with prices increasing and greater uncertainty all around, including in the job market, it would be prudent to increase your cash reserves to cover between six and nine months’ worth of expenses, at a minimum.

It is highlighted that one of the benefits of increasing your savings is the likely fact that even if you have a job, your salary is unlikely to be increasing at the same rate as inflation. Ideally, having multiple streams of income, or at the very least a side hustle, would be best to increase your overall income, but that may not always be possible. Hence, as goods and services get more expensive and your salary stays the same, you may need a way to supplement your budget, and your extra savings could be a way of doing so.

 

5.  Consider Longer Term Investments and Diversifying Your Portfolio

With money becoming tighter, there might be a greater incentive to look for high-yield (and higher risk) investments that promise a quick return. However, now is the time to be even more prudent about your investment decisions, and not allow yourself to be swayed by panic and knee-jerk reactions.

If we are indeed heading into a recession, it is likely that many sectors will be adversely affected, including their stocks. If you sell when there has been a drop in the market, you will realise a loss. If you wait, the market will eventually bounce back. So there’s a lot to be said about being patient and understanding your risk appetite.

It is also important to consider diversifying your investments, to once again manage risk. Having all of your money as cash in the bank is risky, as the purchasing power of cash has been steadily declining. Consider broadening your portfolio to include real estate, stock, bonds, precious metals, and commodities, just to name a few options, which would help to spread the risk, and limit your potential losses overall.

 

 

Image:  wayhomestudio (freepik)