Riding the Waves: Managing Economic Downturns with Financial Planning

By Kaleem Ulah

March 6, 2024

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During any economic crisis, people and families often face financial uncertainty, job losses, market instability, and financial stress. Financial planning involves organising and handling your money to reach your goals while minimising risks. It includes looking at your current finances, budgeting, setting attainable goals, handling debt, spreading your investments, and regularly reviewing the plan. Having a well-thought-out financial plan is even more important during economic downturns.

Planning your finances is important for handling your money, especially when the economy is bad. It's even more important to make smart choices and protect your financial future when times are tough. This blog will discuss different aspects of planning your finances during a financial crisis and give useful tips for dealing with uncertainty.

6 Financial planning steps to follow during an economic downturn

The thought of something out of control happening seems less scary. If the economy is in trouble, follow these six steps.

6 planning steps

1. Review your budget again

Having a clear business plan during a recession is even more important. Knowing your costs before you think about possible changes in your cash flow can help you relax when things are uncertain. Also, when the market is uncertain, the last thing you want to do is take on more debt. Pay close attention to your money. Compare your income to your costs. Figure out your financial goals and determine how you normally spend your money. You can expect the prices of everything to go up, from food and petrol to loan rates. These changes could strain your budget, so plan to make changes early.

When the economy is bad, planning for the future and reviewing your retirement plans again is also smart. If you plan to leave soon, you shouldn't ignore how important it is to keep up with your portfolio during the recession. Instead, consider how to keep contributing, even if it means changing your daily spending.

2. Deal with debt

As of late, interest rates have been increasing because the Federal Reserve has tightened monetary policy to bring down inflation. The higher rates could be bad for people who borrow money, especially those with bills that keep coming back, like credit cards. If you have a lot of debt, consider debt consolidation: You can get a single loan with a set rate and use the money to pay off other debts with higher interest rates. This helps you make your bills easier and helps you save money on interest. For businesses that want to boost their finances, read the guide to mastering business financial planning.

3. Manage your expenses

Folks waste cash on late fees and financial charges all the time, but they do it anyway. You should pay extra attention to this subject when you lose your job. Being organised can help you save much money on your monthly bills. One late credit card payment could cost you $300 for a year. Even worse, it could cause your card to be cancelled when you need it.

Do an account check-up twice a month to ensure you don't miss any due dates. Plan to pay electronically or by mail so your payment arrives a few days early. In this way, your cash will probably still arrive on time, even with a delay. Start listing all your accounts if you can't remember them. When you're done with your list, you can use it to keep track of all your accounts and see which ones you can close or join.

4. Invest in valuable assets

Putting more money into assets (things that go up in value), like stocks or real estate, will pay off in the long run as your cash savings grow. Investing with a 10-year view is important. You can get more things for less money when the economy is bad. This is a regular occurrence for the stock market to go down, which gives investors a chance to buy discounted shares of good companies. It is very important to remember that trading is a long-term game for money. So, don't let the short-term changes in the market stop you. When the economy is bad, dollar-cost averaging, which means buying in the stock market over time instead of all at once, is very helpful.

5. Add to your source of income

People may be unable to count on their jobs during a recession because many businesses will try to cut costs. So, you can expect job cuts because the company is shrinking and people are being let go. Even if you have a steady job now, you should still be ready for anything that might happen during a slowdown.

Getting a second job might not make sense, but you can find other ways to make money. Plant seeds right now that could make you money in the future. If there is only one source of cash for you, think about how to change that. Having "extra eggs in your basket" could help keep your income going if something unexpected happens. If you have extra money, you can save more, pay off debt, and build up your backup fund. This means everything you do, even if it's just a side job in your free time, counts.

6. Set up an emergency fund

When the economy is bad, having a big backup fund is important. Keep three to six months' worth of costs in an easy-to-reach place. This emergency fund will protect you if you lose your job or your income drops. Even when the economy is doing well, you should keep adding to your emergency fund to ensure it will be enough when things go wrong.

Conclusion

The research of the impact of economic downturns in Australia showed the effects on small businesses and individails more. You can't just "set it and forget it" when preparing for an economic downturn. It's important to have a detailed financial plan for each client, but we also know that these plans need to be looked at often and changed as goals and circumstances change. It means the process is complicated and going on all the time. Most people will benefit from working with a financial expert to make and keep up with their financial plans. If you hire the right financial advisor, they can help you reach your long-term goals and prepare for the expected recessions. 

The Kalculators has been helping clients through all kinds of business situations for over eight years. As professionals, we always give advice based on facts and put our clients' needs first. We can't say when the next recession will happen, but we'd love to discuss how you can prepare for it. To start that preparation, please get in touch with us to set up a free meeting to get to know each other. 

Frequently asked questions

Why is it important to have a financial plan during an economic downturn? 

Economic downturns can have significant impacts on your financial stability and future wealth. A financial plan can help you navigate these challenging times and protect your assets. A financial plan can help you assess your current financial position, identify potential risks, and develop strategies to mitigate the impact of economic downturns on your finances.

How can planning your finances help people and businesses when the economy is bad?

Financial planning is useful when the economy is bad because it helps people and companies decide how to spend their money, find ways to save money without sacrificing long-term goals and build a strong foundation for future success. It gives you a plan for handling financial risks and adjusting to new situations.

What are some important parts of a solid financial plan for when the economy is uncertain?

In uncertain times, a strong financial plan includes the basics, like emergency funds, budgeting, and managing debt and a thorough risk management plan. This means putting your financial plan through stress tests, case analysis, and planning what to do if different economic situations happen. You must do regular checks and make changes to stabilise your finances.

What changes should be made to business plans when the economy is bad?

When the economy is bad, investors should consider how much risk they are willing to take, spread their portfolios across different types of assets, and consider safe investments like bonds or stocks that pay dividends. It is important to consider the long term and not make hasty choices based on short-term market changes. Professional help can give you useful information that is specific to your situation. If you are an entrepreneur, check out The ABC to Business Finances

How can people keep their jobs and income safe when the economy is bad?

Networking is more important than ever when the economy is bad because it can lead to new job possibilities. Continuously improving your skills and adapting to changes in your field can help you get a job. Having more than one source of income, like work or passive income, can help you feel safer about your finances.

How can businesses make their finances work better to survive economic downturns?

Businesses should cut costs and develop new ways to work more efficiently. This could mean getting new technology, renegotiating contracts with suppliers, and giving a wider range of goods and services. Long-term sustainability can also be helped by strategic relationships and projects that focus on customers. 

 

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About the Author / By Kaleem Ulah

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Kaleem is CEO & Author at "The Kalculators". With more than 10 years of experience in financial services, He built Kalculators to transform your financial challenges into strategic triumphs!

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