Want to cut costs before a possible recession? Here’s what should go first.
We don’t need a lot stuff. The pandemic has proven that to us.
We live in a nation of excess and waste. For many of us, purging unnecessary things was a fun pastime as we kept our social distance. I sold nearly $500 worth of furnishings, toys, clothes and other odds and ends online; I was completely surprised that there was a market for stuff I no longer needed.
That was the best training for our next hurdle, a recession.
Whether the economy goes into the gutter or not, we all need to get our houses in order. Not just tidying up, but rather, making some tough decisions about how we spend our money.
That’s a challenge because many of us want what we want when we want it, even when we don’t have the money for it.
“The issue is not about income, it’s how much we spend,” said Rahul Verma, a professor of finance at University of Houston-Downtown. “Most of us spend too much. It’s about controlling our spending.”
As the alarm sounds for an impending recession, it’s easy to fill your mind with doom, especially with inflation at a 40-year high. But don’t panic. It’s hard to make good decisions when you’re scared.
“Use fear or worry as a motivation for change. Look at running your household like a business,” Verma said. “This is making all of us reevaluate our finances. Driving a BMW or a Lexus is not important right now.”
No one would ever call me a spendthrift. I’m not an excessive shopper and prefer do-ityourself projects. I don’t even use a credit card. But my guilty pleasures are music, movies, home décor and travel.
During the pandemic, I fell for the discount deals on music and movie streaming services and home accessories sales. I also signed up for a regular grocery delivery service, which seemed like a huge convenience at the time.
All of those services have been cut from my budget. I’ve also reevaluated insurance policies, utility bills and phone service contracts to find as much savings as possible. Those were the easy things to do.
The difficulty has been cutting the things I want — like a nice bottle of wine or pricey manchego cheese, a dinner out with friends and a dream vacation.
Verma said many people try to rationalize discretionary items, such as entertainment and recreation, into nondiscretionary ones, which are essential, such as a mortgage payment or utility bills.
Note: A vacation is not an essential item right now. It pains me to write that.
“We have to be honest with ourselves. Changing our habits is the most difficult. We need the courage to embrace utilitarian spending,” he said.
We’ve all been warned about the need for an emergency fund, say three to six months of salary stashed away. But who really has that? Maybe it’s a lack of discipline or care or both, but it should be a goal.
“Most people don’t live on a budget,” said Cheryl Creuzot, president emeritus of Wealth Development Strategies LLC and author of “Real Lives. Real Money.” “It’s time to tighten your belt, reduce your spending. Pay down on your debts.”
It’s easy to turn to credit cards to cushion the recession pain, Creuzot said, but now is not the time to rack up more debt. Start paying down your highest debt, say a credit card with a $20,000 balance, she said. Then scale back purchases and look for coupons and discounts.
Creuzot and her husband, who are empty nesters, typically ate dinner out nightly, she said. Now they only go out once a week. She also scrapped the idea of getting a Peloton exercise bike.
Side hustles, or second jobs, are an option, especially as the labor market continues to be strong.
Creuzot’s daughter-in-law, an assistant principal by day, now teaches infants and toddlers to swim during the evenings and on weekends.
“A lot of people are surprised that they have other talents that people will pay them for,” she said.
She also suggested talking with your children about cutting back.
“Sit down with them and your budget and cut those things that are not necessities. This is not the time to take your money and run for the hills. This is a normal cycle of things,” she said.
A recession will hit people differently. Lower-wage workers are likely to feel the hardest pinch.
“Anytime we have a hardship, the lowest paid are the most impacted. But we have to turn lemons into lemonade,” Verma said.
Thankfully, a recession won’t last forever.