During uncertain economic times, like when it’s not clear how the money situation will turn out, it’s smart to have a plan in place. This blog post is here to help you with practical and simple advice on how to prepare your money for challenging times, especially when a recession might be on the horizon. We’ll share useful tips and steps you can take to make sure your finances are in the best shape possible to weather any financial storms that might come your way.
The Context
It’s a recession when your neighbor loses his job; it’s a depression when you lose yours — Harry S Truman
As per the World Bank reports, the world economy has experienced four global recessions over the past seven decades.
Chronologically the global recessions were recorded in 1975, 1982, 1991, and 2008. During each of these episodes, annual real per capita global gross domestic product contracted.
This contraction was accompanied by a weakening of other key indicators of global economic activity.
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The last economic crisis (FY 2008) found its reason in the collapse of the housing market; fueled by low interest rates, easy credit, insufficient regulation, and toxic subprime mortgages (home loans to high-risk borrowers). The subprime fiasco was an isolated event but then the twigs, leaves, and branches kept piling up to a point where the joyous little campfire became a full-blown inferno.
Recessions are an inevitable part of business cycles. The widespread consensus anticipates a recession or a recession-like situation every 7 years. Since 2008, things have gone smoothly, and 14 years of peace is a good amount of time to consider the tragedies that came before and make plans for the future. Invincible but bruised by the blows of pandemics, inflation, food shortages, and conflict, we are still climbing toward an economic high; danger may just be brewing around the corner.
The paranoia is already in the air as the global recession risk is entering turbulent waters.
We are committed to ensuring that our community has access to all the knowledge required for a smooth financial journey. This comprehensive toolkit is designed to assist you in setting up some controllable aspects in order during these unpredictable times.
As they say, being prepared is always better than being shocked!
Start Building Your Emergency Fund
In the majority of our dissertations, we like to repeat this as one of our favorite themes. An emergency fund is like a relaxation pill for all the good and the bad times. Putting together emergency savings does not happen quickly. Since it is more of a constant procedure, the sooner you begin, the better off you will be.
Recessions demand extreme sacrifices. Sudden pay cuts or job losses usually take a heavy toll on the mind. The shock can last for days, weeks, or months restricting your brain’s capacity to think and respond. Modest retreats and simple solutions are hard to come by during times of frightfulness.
An emergency fund assists in this situation to help hold the ground, till you assemble a plan to come out of the crisis. An emergency fund, also known as a contingency fund, is a personal budget set aside as financial insurance for future mishaps or unexpected events.
The amount of capital that you want to keep in your emergency pool depends on several factors. This could be your capacity to save, your monthly commitments, and your lifestyle. Ideally, you should always operate with the flexibility to limit your expenses during times of restricted cash flows.
As a generally accepted thumb rule –
≡ Should you have steady employment, you must have enough money for at least three months.
≡ If you work a contract job, at least six months’ worth of spending.
≡ If you are an entrepreneur, at least a year’s worth of spending.
The instruments that can be conveniently accessed and liquidated without exit loads or devaluation must be used to build an emergency fund. These instruments could be liquid funds or a simple fixed deposit, etc.
Pay Down Your Debts
Debts are, by far, any salaried person’s largest commitment. We borrow today to enjoy the life of tomorrow in anticipation of never-ending cash flows (active income).
While good debts and mindful leverage are wonderful tools for building wealth, they act as nitpickers during bad times. The anxiety of missing payments on a home, car, or personal loan compels many people to endanger their lifestyles and peace of mind.
A job loss blended with the constant bickering of collection agents is the worst nightmare for anyone. It’s always better to prepare for the worst by paying down excessive debt wherever possible. This also implies suspending leveraged purchases (loans) till the time the fogs clear out and your situation stabilizes.
Don’t Be That Unwanted Employee
Employment is a fiercely competitive turf where output is continually tracked. During recessions, high performers frequently have greater job stability. It’s straightforward to distinguish between organizational assets and liabilities from an entrepreneurial perspective.
The majority of businesses just cut their losses by first ousting the underperformers from their employment if there is even the slightest hint of financial hardship. This shouldn’t be interpreted as a callous action but rather as a survival tactic. These activities are typically taken to bolster the company’s financial statements and boost investor trust.
The majority of employees in smaller, micromanaged, and cash-strapped businesses are already aware of this. However, in larger businesses with more bureaucratic levels, workers frequently experience this as a surprise. Many poor performers don’t even recognize their shortcomings until they come across the emergency beacon. The old culture of reviews and appraisals frequently postpones timely feedback and “Pull up your sock”-style hints.
Here are a few indicators from the viewpoint of an employee that your career might be in jeopardy:
≡ Stagnation or monotony in your current role
≡ A sudden influx of ‘uncalled-for‘ escalations in your usual work
≡ Reduced communication from your supervisors
≡ Accelerated show cause or ask for too many justifications
≡ A sudden and unexpected change in your role and responsibilities
≡ Loads of negative feedback and uncomfortable inquiries
≡ Reassignment of critical tasks to peers
≡ Behavior changes among peer group
Even though each of these indications may be interpreted differently when taken alone, their combination may indicate that you are losing ground on the corporate ladder and are now only a wanderer in the corporate carnival.
The counter-strategy here is to step up your game as soon as you can to overcome these odds. You can only do this by up-skilling yourself. You are advised never to toss your weight at the sympathy of authorities or managers.
It’s about taking control of your situation by professionally strategizing your actions. This can simply be done by diversifying your undertakings, and by not shying away to pick up new opportunities — no matter how substantial or puny they seem.
Taking ownership will help you skimp on the feeling of being victimized if the unthinkable (a layoff) happens. In the worst-case scenario, if you decide to pursue a new position within the same or another company, your up-skilling efforts will empower you to better negotiate.
Start A Side Hustle
Backup preparations are what make recession survival tactics so beautiful. One such fallback option that can test and transform your life is a side business.
A side business is similar to a spare wheel. You can start this business in addition to working a 9 to 5 job. Hustles are a great way to supplement your income and strengthen pads to your lifestyle during adverse situations.
It’s not simple to balance full-time work with a side business, but that is quite understandable. The opportunities in “Side Hustles” may end up being enormous because the potential of your employment is only as great as your monthly salary.
Organize your priorities, block your free time, and hold yourself accountable for the business that you want to venture into. Side hustles are easy if they are planned for the long haul, aligned with your areas of interest, and validated by consumer demand.
This could be online tutoring, freelancing, drop shipping, affiliate marketing, food delivery, photography, preparing market reports, life coaching, or advising. An extensive pool of hustle ideas can be derived from your skills, experiences, and circle of competence.
Here are some great resources to explore for freelancing opportunities.
≡ Upwork Inc.
≡ Fiverr
≡ Toptal
≡ Behance
≡ Dribble
Please review your employment contract and workplace policies before proceeding to avoid any potential conflicts of interest.
Keep Your Resume Updated
Unbelievably, a CV serves as your sales brochure.
It is a formal document that provides an overview of your professional qualifications, including your relevant work experience, skills, education, and notable accomplishments. A resume helps you demonstrate your abilities and convince employers that you’re qualified and hireable.
Ideally, you should update your resume every 6 to 12 months. A ready reckoner of your achievements will add to your overall confidence, should you need it in adversity.
An ideal resume must be well written, tailored for each target position, results-oriented, and should advertise YOU as a brand. Keep it simple, truthful, and brief to get noticed among the hiring managers.
Feel free to download this print-ready, fully editable no-cost resume template.
Stay In The Network
Recent years have unquestionably impacted tangible social networks. People are turning to digital platforms to gain attention by sharing their success stories, certifications, and qualifications.
While it looks like a blessing in disguise, the problem lies in the truth that everyone is doing it the same way! Resumes that are flying around on job portals are often processed on economies of scale.
Additionally, the majority of employment portals are increasingly willing to sell add-ons. These random goods include a variety of professional services, haphazard training modules, and elaborate memberships without any assurance of significant results.
Most job portals have now become oceans of hope where personal data is being happily dumped by many needy individuals without realizing how it’s being utilized. The best way to get noticed amongst this magnificence of overkill is through your private networks.
References are still hot when it comes to finding great talent or seeking amazing opportunities. Always stay in touch with your friends and people whom you’ve historically worked with. Your professional equity is your greatest asset when it comes to hunting down a job.
Never be afraid to ask for assistance, and never forget to pay it forward to help your friends, your community, and your network.
Pay Attention To Economic News
Finding information on the state of an economy through the news is a great idea.
Similar to how investors connect the dots to spot possibilities in the investment world, economic news typically raises red lights to show persistent turmoil in macroeconomic conditions. Bankruptcies, financial scandals, sanctions, unemployment, political unrest, etc. can pinpoint the possible need for action.
Stock markets are also a reliable predictor of general sentiments. Euphorias would suggest prosperity, whereas uncontrollable sell-offs or protracted sideways moves would be signs of unease and disaster.
Monitor Your Employer Performance
Many people might be surprised to learn this, but it’s actually quite a straightforward strategy. A beautiful skill that can be used to assess stocks, people, and your employers is fundamental analysis.
You may check how well your employer is doing in the same way that your employer reviews your performance. Good companies have nothing to conceal, and their official corporate statements contain all the information you need for this research. Use your knowledge of fundamental analysis to assess your employer’s debt as well as other crucial performance indicators, such as sales growth, EPS (for listed companies), assets, and liabilities.
A big change in these figures may be cause for concern. This works better if your conclusions can be supported by previous company measures taken in comparable circumstances. Keep in mind that if you try to outsmart your employer by obtaining such data illegally, you will certainly be fired. Always use legitimate ways to obtain this information.
Keep your analysis to yourself since less informed comrades will always look for sneaky methods to fool the informed ones. Throughout the process, avoid getting involved in workplace politics and rumors.
Review Your Budget
These days, no amount of money is sufficient. Most people continue to upgrade their lifestyles in line with their income.
Difficult circumstances such as a recession necessitate cutting back on some expenses that are not long-term viable. It’s a good idea to assess your spending patterns and monthly budget during a recession or a circumstance that feels like one.
Create a clear understanding of what expenses are discretionary and what is not. Spending on “wants vs. needs” distinguishes discretionary expenses from non-discretionary expenses. Money outflows that are necessary, such as rent, home loans, transport costs, and utilities, are referred to as discretionary expenses (needs).
Non-discretionary expenditures are more opulent or “frivolous” items, such as the cost of your daily coffee, rounds of golf, or holidays (wants). Understand the absolute minimum that you can live on. This serves as both a guideline and a benchmark while you build your emergency savings as well.
Re-arrange Your Investment Portfolio
Your investment portfolio tends to take the biggest hit during a recession and this usually mandates re-balance and re-arrangements. The approaches used to address this issue would typically be different for someone approaching retirement (low-risk tolerance) compared to someone who is in their prime (high-risk tolerance).
Additionally, you should always monitor your exposure to risky instruments like stocks (equity). During a recession, stocks frequently take a beating. Even though there is no certainty, debt investments are typically thought of as more reliable than equities.
The price of precious metals such as Gold also tends to rise during downturns as they are considered to be safe havens. During economic upheavals, a stock-heavy portfolio in general can be focused on stocks that deal in discretionary revenue (need-based products). Regardless of the state of the economy, people are still going to spend money on medical care, household items, electricity, and food.
This would include sectors like healthcare, utilities, and consumer goods. But remember, this usually acts as a part of the insulation technique. Though the re-arrangement is necessary during recessions, the strategy must always depend on the intersection of life you are at.
You should always consult a registered (fee-only) financial advisor to construct your unique recession-proof portfolio. Alternatively, you can also subscribe to our comprehensive module and Do it yourself!
Conclusion
Recessions are impossible to anticipate, and they are also very difficult to identify. Two consecutive quarters of decreasing GDP are the most commonly used definition of a recession. A more accurate definition identifies a recession as the occurrence of negative gross domestic product (GDP) in an economy, together with additional factors including rising unemployment and declining demand.
Surprisingly, the negative contraction in GDP for just one quarter or two alternate quarters would not officially qualify for any economic definition of recession. Given the GDP data’s historical characteristics, changes, and descriptional ambiguities, there is always a higher likelihood of experiencing a full-blown recession without any obvious warning. There are several tools in this toolbox that can help you adequately prepare for economic uncertainties, even though extreme actions should only be used when there are clear warning signs.
Hope you enjoyed reading it.
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4 Comments
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