Recession-proof finances

How to prepare for a recession

Fight back with these 7 ways to recession-proof your finances

Most experts agree that the global economy is currently heading into some type of recession. Many people are already out of work, and many others are heading into a period of economic uncertainty.

Yet, in those stories about a coming economic recession, there’s almost always a key part missing: what does it practically mean for me? A recession means a higher unemployment rate, which means more job uncertainty for many people and a little bit more difficulty finding work for anyone who becomes unemployed. For those who keep their jobs it might mean wage freezes, and for small business owners, it will likely mean a significant disruption to cash flows.

Perhaps more importantly, what practical steps can you take during a time of uncertainty and unprecedented change? – Here is a checklist of 7 things you should be doing to navigate a recession.

1. Think wisely and resist the “urge to splurge” when the lockdown is lifted

When the New Zealand lockdown is lifted, you’ll likely be bombarded with an array of offers, discounts, and deals. Instead of being lured by such temptations, take time in advance (before the lockdown is lifted) to carefully consider if there is anything you need. Then doublecheck to ensure this is based on your needs and not wants. Giving careful forethought to any expenditure will ensure you’re being deliberate about any spending decisions that need to be made.

However, part of the reason you’ll receive an array of offers will be many small and mid-sized businesses trying to get themselves back on track after a period of hibernation. If you’re financially able to do so, perhaps you’d like to make a deliberate decision to ‘shop local’ to assist these sorts of businesses in your local area? (For example, an occasional coffee at a family-owned café). If this is the case, ensure you still give careful forethought to any spending decisions.

2. Check your credit rating (“credit score”) and get it in good shape

Your credit rating affects more than just your ability to borrow money. For example, many jobs will check your credit rating before hiring you, as your credit score is seen as providing a good snapshot of how reliable you are. Of course, if you need a loan for any reason, then you’ll also be the subject of a credit check.

Therefore, as a recession nears, it’s a good idea to do a basic credit check-up and take care of any blemishes that might appear on your report.

To check your credit score, you can usually do so online for free using one of the three New Zealand providers; Credit Simple, illion, and Equifax. When you get your report, ensure you thoroughly check it for accuracy. This includes seemingly harmless but inaccurate information. If anything is wrong you can ask the credit reporting company to correct it, each company has their own procedure for this.

People say that you shouldn’t worry too much about your actual credit score – that’s because there are so many variants about how a credit score is calculated. Focus instead on having a healthy and accurate credit report, as that will ensure a healthy credit score regardless of how it is calculated.

3. Cut back spending on non-essentials and bills

The single most effective thing you can do for immediate impact is cutting back on your own spending. Cutting spending results in more money in your own pocket, and those immediate rewards can be used to accomplish many of the other things on this checklist.

When people think of “cutting back,” they almost always think of the products and services and experiences they care about most, and that can result in negative feelings about the entire idea of trimming expenses. Instead, the key when it comes to cutting spending is to focus on unimportant and less-important spending.

Not sure where to start? Try these 19 budget-busting tips.

4. Start shoring up your emergency fund (or building one if you don’t have one)

An emergency fund is simply a pool of money you’ve set aside for contingencies of any kind — perhaps the loss of a job, a car problem, an unexpected family issue, an illness, and so on. Having a readily available pool of money to counter those events makes them much easier to handle, and this is never truer than during an economic downturn.

Learn more about why you need an emergency fund.

5. Repay debt

Debt payments can often be some of our biggest monthly expenses, so paying off debt is a no-brainer. These expenses can also be frustrating to repay when you’re struggling to pay your other bills and support yourself. Consumer debt, like credit cards, should be your top priority. This is especially true because you normally can’t request to defer your credit card payments if you lose your job or come under some other kind of financial hardship.

Note that debt repayment only works if you keep your spending below your income level. If you spend more than you earn, then you’re accruing debt, and its likely high interest credit card debt. Repaying debt is valuable, but it must follow cuts in your personal spending.

Recession financial tips - stay calm

6. Keep calm about the temporary state of your retirement savings and other investments

During an economic downturn, many investments will decline in value, which might set off a lot of worries about your investments for retirement or other purposes – perhaps your children’s education.

Instead, remember that your investments were set up in the first place with an understanding that markets will sometimes fall in value. Part of the nature of investing is that sometimes it drops in value, and that’s okay.

If the rest of your life is financially stable, consider increasing your contributions. A moment of volatility (when prices fluctuate) is a good time to invest more. One of the best things you can do for your retirement planning is to buy as many shares as you can as far in advance of retirement as possible – because their value trends steadily upwards with time – and volatility provides you with a great opportunity for doing so. This includes ‘buying’ shares via investments such as KiwiSaver and managed funds, and usually also applies to other investments such as property when they fall in value too.

7. Maximise your professional value

One of the biggest personal finance risks during an economic downturn is the risk of job loss. Losing your job can cause a lot of short-term economic pain and can lead to a lot of long-term economic consequences, too.

To recession-proof your life, one of the best investments you can make is elevating your education. During recessions, the unemployment rate for those with few or no qualifications is much higher than for those who have built up qualifications. Make the most of this by ensuring that you have some training and skills that are broadly employable.

Ask yourself the following questions:

  • Do you have a reputation for being a valuable, efficient, and reliable contributor to your workplace?
  • What skills are most in demand in your field of work?
  • What transferable skills do you have? – skills that might apply to other fields.
  • If you were to suddenly need another job like your own, what traits, qualifications, or experience would companies that might hire you be looking for?
  • What additional training could you do to make yourself more employable and/or promotable? Particularly if it’s available through your current job.
  • Do you have a good network of professionals who might be able to assist or provide advice?
  • When did you last look at your CV? – Ensure it’s up to date with all your work history, skills, certifications, and other relevant material regarding your career. This makes it easier to immediately roll into a job hunt if necessary and can even attract attention from people who may be seeking people like you.

How to recession-proof your finances - the bottom line

The tactics on this list are all practical steps you can take to improve your financial situation going into a recession. But the truth is that many people will read such a list and not act.

The key to success is action. When you turn the things you learn into action, that’s when things improve.

Here’s a recap of the seven ways to recession-proof your finances:

1. Think wisely and resist the “urge to splurge” when the lockdown is lifted

2. Check your credit rating (credit score) and get it in good shape

3. Cut back spending on non-essentials and bills

4. Start shoring up your emergency fund (or building one if you don’t have one)

5. Repay debt

6. Keep calm about the temporary state of your retirement savings and other investments

7. Maximise your professional value

Now, it’s up to you.