Re-evaluating your finances during a contracted economy may be beneficial for your financial freedom and peace of mind during 2020.
Before we dive too deep into the topic, let’s first visit the definition of what a ‘contracted economy’ is. “Contraction, in economics, refers to a phase of the business cycle in which the economy as a whole is in decline,” according to Investopedia. With South Africa’s economy contracting with 2% in the first quarter of 2020, according to Statistics South Africa, this has now become a reality that is faced by all South-Africans.
While load shedding was one of the main culprits for the economic contraction in the fourth quarter of 2019, the impact of Covid-19 emerged as the main cause for the extension of the contraction into the first quarter of 2020.
Since the nationwide lockdown was first announced on 23 March, the country’s economy has taken massive hits and a lot of people are left with uncertainty, financial stress, and dilemma, and finances during a contracted economy are now a conversation. When disasters strike you do not want to be caught between a rock and a hard place, but rather be prepared and organized, financially.
How you can ease the pressure of the contraction on your finances
Save for an emergency fund
The contraction of the economy can place our jobs and income in jeopardy, with the unemployment rate expected to reach 50%. This is why it is important to have an emergency fund as a backup. Chances are that when the economy is in a decline, you won’t be saving any money, but rather covering unwanted expenses. Experts say that an efficient emergency fund should cover between three to six months of basic living expenses. This can easily be accomplished by making savings a priority in more stable times. When it comes to saving money, you will have to prioritize expenses, set saving goals, and look for ways to cut your expenses.
Cut back to a more frugal lifestyle
Choosing to live more sparingly might sound unpopular and skimpy, but a frugal lifestyle isn’t about counting every penny. Instead, it’s about making conscious decisions when it comes to expenses and spending. While when the budget is tight, you might be tempted to take on debt, but this is only going to cause more financial pressure in the future.
Establish a budget
Setting up a budget and sticking to it can be difficult but it can be the key to your financial management and not finding yourself in a sticky situation. The rule of thumb is 50% of your net income should go towards needs, 30% to wants, and 20% should be going into your savings account. Nowadays there are loads of systems and mobile applications to help with setting up a budget and tracking your progress. So, while the country might be fighting a financial war, keep track of your expenses to assure financial freedom.
While this might be an uncertain time for all, there are things you can implement to ease the pressure on your finances. Keep your eye on the economic stance and do what you can to be prepared.
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