How to prepare and survive a recessionVincent Tan
The talk of an economic slowdown or recession is rife. Experts are predicting that a recession could happen as early as 2020 while some are predicting it to happen later. The fact of the matter is that a global economic slowdown is quite evident already. From an economics standpoint, a recession is a business cycle contraction when general business activities slow down. Historical and academic accounts tell us that a recession happen once every ten years, plus or minus. Consequences of a recession are slowdown in production, slowdown in business activities, slowdown in wages growth and the obvious loss of jobs. Regardless of when an actual recession happens, here’s how to prepare and to survive a recession.
Managing debts is not deleveraging. Managing debts is the art of better matching your debts to the pattern of your cash flow and to reduce the cost of those debts. The vast majority of the population have some form of debt – the most common being housing mortgage, automobile financing and unsecured loans. Therefore, to prepare for a recession, get rid of debts with the highest cost (interest rates) and if possible, refinance debts to those with lower interest costs.
Create an emergency fund
Some experts or financial gurus recommend saving up at least six months’ worth of your salary or twelve months’ worth of your expenses for rainy days. Regardless of the amount, you should always have surplus cash to last you for the duration should an adverse situation occur such as a loss of job, loss of income stream or an unexpected surge in expenses.
Additional stream of income
If possible, create additional income streams such as a small side business or freelancing services. The idea of having additional stream of income is to buffer the adverse impact should your main source of income is compromised ie. loss of job, reduction in salary and removal of company benefits. These additional sources of income will provide you with some cash flow until your primary income is restored.
Manage your expenses before a downturn
Managing your expenses should be done way before a downturn occurs. In fact, expenses should be monitored frequently to match your stream of income. Where possible, it’s always prudent to cut down on unnecessary expenses and try to look into areas where you can save. For example, go through your expenses to reduce entertainment costs and to scale back on expensive subscriptions.
Diversify your investments
If you have some form of investment, be it in the equities market, debt market, property investment, mutual funds or simply having cash in fixed deposits, be sure to properly diversify your investments well. During an economic recession, it can sometimes be difficult to accurately predict which investment class will suffer and which will prosper. Therefore, the old saying of not putting all your eggs in one basket holds true.
Investing in yourself
Layoffs are common during a recession. To protect yourself against redundancy, be sure to equip yourself well with in demands knowledge and skill sets. Upgrade yourself by getting a Master’s degree, an MBA or some form of post-graduate qualifications. This will help you be more valuable compared with your peers and in an event that you are retrenched, you will have that little added advantage to quickly secure new employment.
Recession often comes gradually but there will be plenty of visible signs around when that happens. The key point to note when preparing and surviving a recession is early preparation. Preparing early and anticipating a downturn will put you in a relatively safe spot should the adverse happen. If a recession doesn’t come, you will still benefit by having a stronger financial position.