How to bulletproof your finances in a recession
Australia has officially entered recession for the first time in nearly 30 years, and with the continued presence of COVID-19, we may be in for a protracted period of economic fallout.
Despite the drop in economic activity, as a country we are still doing better than many other world economies – for the moment. That said, people are understandably concerned about the impact this recession will have on their everyday lives, as recessions typically bring a reduction in employment, reduced pay rises, and stricter lending requirements for loans and mortgages.
As individuals a recession is something that is beyond our control, but what we can control is how we prepare for it. Here are some top tips to help recession proof your finances.
Update your CV
During a recession not all businesses are viable, and others need to cut their costs to survive. We are already seeing significant increases to the unemployment rate, and there could be more pain over the coming months as schemes such as JobSeeker and JobKeeper come to an end.
Therefore, it’s a good time to consider updating your CV and social media profiles such as LinkedIn and sign up to job websites just to get a feel for the current market conditions.
In the event you find yourself seeking alternative employment, you will be ready to immediately apply for opportunities as soon as they are posted, and with an increasing number of people chasing limited vacancies, you want to make sure you don’t miss out on the perfect role for you.
Go frugal and create a monthly budget
Budgeting experts typically recommend that no more that 30% of your income (after taxes) is spent on discretionary items. So, knowing how much and where you spend it, can help you identify problems.
Paying rent, groceries, gas, electric, legally required insurances etc are all essential expenses. Socialising, Netflix, and anything you would potentially consider to be a lifestyle expense is discretionary.
The goal is to increase your available ‘free’ cash by getting your expenses under control.
Start by writing down all the money you expect to receive over the course of a month. With this money, allocate a reasonable amount to food shopping, and then work out how much all the other essential household bills add up to. Split that into four, so you have a weekly budget to work with.
Any left over money should firstly be prioritised to paying down debt (such as your credit card), then building up the savings in your emergency fund.
Many of us find that once we have done this, there is nothing left to allocate towards lifestyle/discretionary spending, so then we need to look carefully at each essential expense and find ways of reducing what it costs. For example, buying from multiple supermarkets to take advantage of deals and get the weekly grocery bill down, or switching energy suppliers to get a better rate on our bills.
By writing down your financial budget, you have something you can look at and check you are following it, and also more easily highlight areas where you may be being financially stretched beyond your means. The Raiz App has an in-built My Finance tool to help you with this. My Finance is a free to use feature within the Raiz App. It provides you personalised insights and notifications on how you are spending.
Slash your bills
A good way to generate extra cash flow is to spend some time checking that you are paying the cheapest price for everything that you purchase.
Check to see where you can save money on ‘energy contracts’. By using comparison services like Raiz Energy, you could instantly save by locking in a cheaper supply agreement while also earning a bonus reward into your investment account or your emergency fund savings goal.
Look at all your monthly subscriptions (such as gym access, internet access, mobile phone, Netflix etc). Make sure they have not increased their fees without you knowing, and that you are still getting value out of the service. In some cases, you may be able to switch to a lower cost plan with the same provider, or an alternative provider may offer a better deal.
Check the renewal date on your car, health, and household insurance, and see if it is possible to get a better deal with an alternative insurer. People who remain loyal to an insurer year after year often miss out on hundreds of dollars’ worth in savings as premiums creep upwards.
If you are buying online, look not only for bargains, but also make your purchases through Raiz Rewards, so you are earning a bonus ‘cashback’. With over 250 partners, you’re sure to find many brands and retailers you are already shopping with.
Pay off your debts
Put together a schedule of all the debts you owe, such as credit cards, car loans, mortgages etc and list them in order of highest interest rate to lowest. Your aim is to pay off the debt with the highest rate first before moving to the next debt.
Try to pay off as much as you can afford now, and it may help you if times get financially tougher later.
Alternatively, if you are unable to pay off your debts quicker, you may want to look at refinancing or consolidating your debts. Interest rates are currently at an all-time low, and there has never been a better time to move lender for a cheaper interest rate – there are deals to be had for those willing to make the move.
As always, if you are struggling to make payments talk to your lender and ask how they can help. Many lenders can arrange negotiated repayment plans, or repayment ‘holidays’, especially if you have a good credit history of making regular payments in the past. It makes commercial sense for most lenders to work with their customers to help them repay the debt rather than having a customer default on a loan.
Have your emergency fund ready
You should always be financially prepared for the unknown. To best protect yourself during a recession, build up an emergency fund that can get you out of trouble should an unexpected expense or loss of income occur.
The general rule of thumb is to have between six to nine months worth of expenses saved up. This would normally be a saving or investment account which has instant access, and you can use the Savings Goal feature within Raiz to help you grow your own emergency fund. The aim is to build up this fund as early as possible but be strict with yourself and make sure you leave it untouched unless it’s to pay for a real emergency. This takes discipline, but you will be thankful it is there if the time comes and you need to use it.
Play the long game on your investments
Investing is best viewed as a medium to long term strategy. Ultimately there are only two points in the investment cycle which matter, the price you paid to buy the investment and the price you get when you sell it. Everything else is the roller coaster ride that is the stock market. So, during a recession, buckle in and enjoy the ride, because it may be a wild time!
Markets may see significant drops, but by making regular contributions to your investments you will reap the benefits of dollar cost averaging, and benefit from the opportunity of lower market prices when they occur. You can set this up on your Raiz account by creating a recurring investment within the Raiz App. For more information on Raiz fees, click here.
Always keep in mind that you only really lose money if you sell your investment for less than you bought it for. While markets may go down, historically they have always recovered. It is also true to say that recessions do not last forever. The good news is that at some point in the future we are probably going to see market confidence return, it’s just that unfortunately no one can predict exactly when that will happen!
The bottom line
Understanding your finances and having a plan of action puts you back in control in uncertain times.
Your check list for success is:
- Don’t Panic, but remember you should always carry a towel
- Take stock of your finances, and review your current situation
- Plan for the worst, while staying positive and hoping for the best
- Top up your emergency fund now to avoid relying on credit in the future
- Establish a budget and stick to it
- Investments are like pets, they are for life, not just for Christmas
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The information may be based on assumptions or market conditions which change without notice. This could impact the accuracy of the information.
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