Whether we like it or not, financial crises do occur every couple of decades. Some are more powerful than others, however, all of them have the potential to destroy entire economies and to take your money away in the process. This can happen by lowering the value of the money that you already have or by increasing the interest rates and prices to the point where you will have to spend everything just to stay afloat.
Regardless of how serious the effects of a crisis can be, once you feel that one is close by, it is important to know how to protect your finances or you may find yourself on the verge of personal bankruptcy faster than you can say “financial crisis”.
This having been said, although you cannot completely negate the effects of a financial crisis, there are several methods that you can use to protect your money during periods of time when the economy is freefalling. Here is what you should do:
Create a decent-sized buffer
The first step towards protecting yourself from the effects of a financial crisis is to create an effective buffer. This essentially means that you will have to put money on the side and create an emergency fund, of sorts. This buffer is meant to act as a safety net in case of an emergency, preventing you from using credit.
You should create a buffer fund regardless of what money you already have in your savings account. The purpose of this fund is to allow you to go through the coming crisis without having to tap into your life’s savings.
Make a comprehensive, functional budget and follow it to the letter
Planning is extremely important when the economy is unstable. In other words, you will have to create a detailed budget and to plan your monthly expenses. This will give you a better picture of how much you’re making and spending spend each month and on what products or services.
Once you create the budget and plan your expenses, keep to it no matter what. Keep in mind that going through a financial crisis means that you have to spend as little as possible.
Reduce the amount of money that you spend each month
Once you create a budget and analyse what you spend money on each month, it’s time for a little housekeeping. Go through your expenses and eliminate all non-essential services or products. For example, if you have satellite TV, Netflix, and Amazon Prime Video, it is probably time to shut down two of the services and only keep the cheapest one.
This also applies to luxury products. In this situation, everything that isn’t vital to your regular day-to-day life should be considered a luxury product. Pause any online services that you do not need for work or school and only buy food, basic personal care products and cleaning supplies.
Prepare for interest rate rises
The interest rates for variable-interest loans and mortgages will unavoidably rise. Although you cannot change this fact, you can prepare for it. When planning your future expenses, take this rise into account and try to approximate how much your debt will cost you.
Overpay your mortgage whenever you get the chance
Whenever possible, make sure to overpay your mortgage. This will give you a bit of wiggle room if the price of the property falls. If you have a lot of equity in your home, you should be fine even if house prices were to fall by 10-20%.
Generally speaking, the best way to save your money from the effects of a financial crisis is to spend as little as possible, while also preparing for most expenses to go up. Create a decent-sized buffer, budget your monthly income and expenses, and eliminate all unessential spending.