How to survive a recession: don’t panic

No matter how well an economy might be thriving, there will always be tough times when investments stop growing, markets fluctuate, and employees get laid off. 

Such times can seriously impact our financial lives, especially if we’re not prepared for them. Signs of tough times ahead include:

• Increasing unemployment rates, making it more difficult to improve your income or get a better job. 
• Lower sales for businesses, resulting in lower profits, sometimes even forcing business owners to cut pay, reduce shifts or lay off employees.
• Financial institutions become stricter in lending money to mitigate their own risk.

Booms and busts are an essential part of any economic cycle, and sometimes recessions are simply inevitable.

The key to financial security during tough economic circumstances like a recession is to build in some cushions.

Follow these simple steps to prepare for the coming recession and avoid last-minute panic.

Step 1 – Set aside an emergency fund

If you haven’t already done it, now is a great time to set aside some money into your savings account. 

When the economy begins to dip, jobs and income are jeopardised. An emergency fund will become integral to your financial goal setting during such turbulent times. 

It will give you peace of mind knowing that you’ll be able to pay your bills even if you were to lose your job.

Emergency funds also give you a safety net to fall back on so you can tackle financial hardships and get back on your feet.

If possible, save between 3–6 months’ worth of your living expenses so you don’t have to rely on credit, which could put you into more debt.

Here are some saving tips to help you deposit more money in your emergency fund:

• Open an emergency savings account, separate from your daily spending account. This builds a psychological wall between the money you can spend and the money you don’t want to touch unless absolutely necessary.
• Automate your deposits so they go straight into your savingsaccount. This prevents the temptation of spending extra money on unnecessary items.
• Funnel extra money like cash gifts, tax refunds and job bonuses to the savings account. It will help you reach your goals faster.
• Cut down on your expenses to save more money fast. This may include eating at home more often or using public transport.
• Downsize your home or move to a cheaper property if your lease is due to expire soon. You can save a small fortune by relocating.
  

Note: Tapping into your emergency fund is never a decision to make lightly. But losing a job is a good reason to use some of the funds you’ve set aside.

Still, remember to rebuild your emergency fund as soon as your financial situation improves.

This prepares you for the next emergency and cushions you when having to make tough financial decisions. It could save you from having to withdraw money from your retirement account.

Related article: 4 mistakes to avoid when planning your retirement

Step 2 – Create a budget and live within your means

Creating a budget helps you cut down on unnecessary expenses, so that whatever comes your way during a recession you’ll have enough funds to support yourself.

A budget also allows you to keep track of your monthly expenses and makes it possible to live within your means. 

Consequently, you’re less likely to go into debt when food or petrol prices increase. Instead, you’ll be able to adjust your spending in other areas to stay within budget. 

Creating a budget involves four crucial steps:

1. Determine your total household monthly income. This includes your total salary contribution, your spouse’s (if any), and any present investments.
2. Tally your monthly expenses, from fixed expenses like rent or mortgage to variable costslike groceries and entertainment. 
3. Add all your expenses together to learn whether you’re spending less, more or roughly the same amount as your total household income. 
4. Prioritise only the essential expenses and identify the least you can spend in a month should you lose part of your income.

    

Your budget must adapt in preparation for a recession. Working with a financial adviser will help you to analyse your situation and implement a cash flow strategy that protects your assets and finances.

Step 3 – Minimise your debts

While you can’t avoid paying off student loans and mortgages, you can minimise your debts by not acquiring new ones during a recession. 

This is also the time to put a break on borrowings. With high interest rates and low job security, taking on new debt adds more liability.

In a recession, you’ll need to prioritise your bills. So ensure you pay your rent or mortgage and other essential bills on time. This will help you to avoid late fees and high interest rates.

Also, avoid the credit card trap. While it’s tempting to fall back on credit card loans when our savings are stretched, doing so only gets you into more debt.

If you had a credit card loan before a recession, aim to pay it off as fast as possible to avoid accumulated interest when situations get tougher. 

If you must take a loan during a recession, opt for a short-term, low-interest personal loan from your local bank. You’ll dig yourself out of debt a lot faster and save money on interest charges.

Reducing your debts lowers your monthly expenses and eventually increases your cash flow. 

The extra money saved from not having to pay debts can then be directed to your emergency savings fund and later invested in ETFs, LICs or mutual funds. 

Step 4 – Diversify your income

When times get tough, an additional source of income will help to keep you afloat.

Relying on one job during a recession puts you at high financial risk, since losing it would mean failing to meet all your financial obligations.

Even if you manage to keep your current job, the drop in demand for products and services may mean you won’t see your salary increase anytime soon – and you may even see a cut in your pay as shifts or overtime allowances are reduced.

To increase your financial security, you must therefore supplement your main income with other high-profit investments, like real estate. So if one income source begins to dwindle, you’ll still have others to rely on. 

Sometimes, diversifying your income means renting out a room in your home, or making money from other assets from services like Camplify. Even something this small can help.

Above all, find a financial adviser

It’s during a recession that a financial adviser’s informed guidance and skillful composure are most helpful. 

A financial planner will help you create a lasting strategy for pursuing your recession goals. This strategy will be aligned with your liquidity needs and risk tolerance levels. It will also be well-diversified to minimise losses.

Even with financial planning, you could have a lot of questions once a recession actually hits. A financial adviser will provide a useful historical perspective, advice and timely guidance.

Below are some of the questions a financial adviser can help you answer.

Poole Advisory has a team of qualified financial advisers who’ll help you sail through the financial storms of a recession. 

We’ll work with you to create an effective cash flow strategy that allows you to reach your financial goals and protect your wealth.

So contact us or book your appointment at one of our offices in Sydney or Bowral to get started. We’ll get back to you in no time.

Don’t just take our word for it. See what Peter, and many other satisfied clients, have to say:

“If you’ve struggled to meet an honest, straight-forward finance professional, go no further. Here’s an expert I’m delighted to recommend…” Peter O

Frequently asked questions

Should you still invest during a recession? 

Yes. A recession is a normal part of an economic cycle and not a valid reason to shy away from investing. 

With proper guidance from your financial adviser, you can invest in recession-proof industries like healthcare and consumer staples.

What should you not do in a recession?

Refrain from taking the following actions during a recession:

• Don’t sell your stocks or properties in a panic.
• Don’t co-sign a loan.
• Don’t splurge on expensive, unnecessary items, like accessories or clothes.
• Don’t neglect your emergency savings fund.
• Don’t make a large purchase with a loan.

   

How long does a recession last?

Previous results show that Australian recessions last for approximately 1 year. However, the Reserve Bank of Australia and other economists warn there can be long-term consequences from an increase in unemployment and business failures.

Compliance Disclaimer:

This information contains general advice only, that is, advice which does not take into account your needs, objectives, or financial situation. You need to consider the appropriateness of that general advice in light of your personal circumstances before acting on the advice. You should obtain and consider the Product Disclosure Statement for any product discussed before making a decision to acquire that product. You should obtain financial or credit advice that addresses your specific needs and situation before making investment or borrowing decisions. Taxation information is based on our interpretation of the relevant laws as at 1 July 2018. While every care has been taken in the preparation of this information, Prosperitas Partners Pty Ltd does not guarantee the accuracy or completeness of the information. The case studies are hypothetical, for illustration purposes only and are not based on actual returns

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