Do I Have to Pay Taxes on Freelance Work?
Freelance taxes and side gig taxes are complicated with so many forms to track and receipts to record. This guide helps you navigate tax season.
6 minute read
Never heard of “recession-day preppers”? It’s a new term the Debt.com team coined to refer to people who envision another financial meltdown just over the horizon. It’s the money version of a doomsday prepper. And like doomsday prepping, recession-day prepping only sounds crazy until the next recession hits… which it inevitably will.
Whether you believe in the possibility of Recession 2019 or not, it’s a good idea to shore up your budget. If the worst happens, you’ll be glad you reinforced your finances to weather the storm. You can be the dependable, financially stable ant in a weak economy full of consumerist grasshoppers who failed to plan.
If you want to recession-proof your budget, your actions will revolve around two tasks:
Less debt means less risk of default and more borrowing power in case you need it. More savings provides a bigger safety net if you encounter any issues with your income and cash flow. Recessions bring higher unemployment, increased risk of layoffs, and lower tips and commissions. In the last recession, full-time employees even had their hours cut, often to 4-day work weeks. So, you need extra savings to pad your financial safety net.
Start by eliminating high interest rate credit card debt first. Ideally, you want to maintain zero balances from month to month. So, everything you charge in a month gets paid off within that billing cycle. This not only minimizes interest charges but also helps protect your finances from risk during a recession.
If a recession hits, you don’t want excess credit card debt hanging around. It gives you less breathing room in your budget because you have more obligations to cover. If the worst happens and you lose your job, credit cards are often the first debts to slip into default.
That means if you believe a recession may hit in 2019, you should take steps now to eliminate credit card debt. If you can’t pay off balances using a debt reduction plan in your budget, consider relief options:
If you really want fast student loan repayment and you have a good, steady income, the best option is student loan refinancing. You can use refinancing for federal and private student loans. This will give you the shortest term so you can really get out of student loan debt fast. However, just be aware that this converts federal loans to a private loan. You will no longer be eligible for federal student loan relief. If the recession hits and you lose your job, that could be a problem. So, consider this carefully before you take this step.
If you’re in either of these situations with an auto loan, refinance now. Your best bet is to get the debt paid off in case the auto loan bubble really does burst.
In normal circumstances, experts say you should have 3-6 months of bills and budgeted expenses covered in savings. For example, let’s say your bills and necessary expenses cost $1,500 per month. A good emergency savings fund would be $4,500 to $9,000. This would allow you to maintain your budget without credit even if you lose your job for up to six months.
However, during a recession, 6 months may not be enough. During the Great Recession, people were unemployed for up to a year or more, on average. So, experts now say that if you anticipate a recession, you should save up to 1 year of expenses. Ideally, you want $18,000 in easily accessible savings accounts.
If that sounds excessive, just remember what this money is supposed to cover. The idea is that you can live on savings until you get a new job if you get laid off. No massive run-up of credit card debt; no payday loans with ridiculous interest rates. You enjoy financial peace of mind even without full-time employment.
The best savings account to have during a recession is a fixed-rate savings account that you open now. Over the past two years, the Federal Reserve has increased the federal funds rate about seven times. That’s the benchmark rate that financial institutions use to set base rates for loans and savings accounts. So, interest rates on loans are on the rise, but so are rates on savings accounts. You can find savings accounts right now that offer a 2% Annual Percent Yield (APY); that’s the interest rate on a savings tool.
If the economy takes a turn, the Federal Reserve will lower the federal funds rate. The idea is to encourage people to borrow to spur the economy. But that will also drop the APY you can find on savings tools. That’s why you want to get a fixed-rate savings account now. Get the account while rates are at their highest.
Also, be aware that if you have a variable-rate savings account, such as a Money Market Account, your growth will likely slow during the recession. The high rates you may be enjoying now won’t last if the economy takes are turn. That’s why fixed-rate accounts are your best option heading into a potentially weak economy.
Arguably the most devastating part of the Great Recession was the real estate market collapse. It was certainly heart-breaking to watch people lose their 401(k) savings in the stock market crash, but most eventually recovered. But when the mortgage market collapsed, families lost their homes and in many cases, there was no going back.
A large part of the mortgage crisis resulted from excessive borrowing against equity. People took advantage of the boom years to take out second and even third mortgages. They used home equity loans and HELOCs without reserve or concern. But when the market collapsed and property values plummeted, those homeowners were severely upside-down. They owed far more than their homes were worth.
The hard lesson learned during the crisis was that borrowing against your home can be risky. Just because you have equity to use, it doesn’t mean that you should. If you worry about a recession, stick to a single traditional mortgage and don’t borrow against your home. In particular, avoid actions like taking out a home equity loan to pay off credit card debt. It’s just not worth the risk!
There’s no guarantee that you can make it through a recession without hiccups in your employment. However, the Great Recession certainly showed the vulnu7erability of several professions:
Lenders can choose to increase or relax their lending standards, as long as they follow federal and state regulations. During a recession, lenders face high rates of default from other borrowers. Basically, they can’t afford another bad loan that doesn’t get repaid.
This means it can be tough to get approved for financing. This is true both of for personal loans and for any small business loans that you may need. If you want to get approved, you’ll need a great credit score and a low debt-to-income ratio. Only the most creditworthy can get approved.
That being said, recessions can often be a great time to refinance. The Federal Reserve typically lowers interest rates during a recession to stimulate the economy. If you have great credit and you followed the advice above, you can get really attractive rates on loans. Just make sure you have the means you cover the payments on whatever you borrow.
Published by Debt.com, LLC