How to recession-proof your financesYun Ting
Daniel Hannan, a member of the European parliament was once quoted saying. ‘You cannot spend your way out of recession or borrow your way out of debt’. During a financial crisis, recession, economic depression or any other terms to describe an economic slowdown, the first thing we as individuals must do is to ensure that our finances are protected. In this case, finances encompass a broad aspect covering our income, expenses, insurance coverage and cash flow. Of course, all these precautionary measures have to be taken before an actual recession happens and often, steps to secure and improve our finances is an ongoing process. Here are some general ways on how to recession-proof your finances.
Understand your financial position first
Most people do not actually take the initiative to understand their financial position properly. As much as they know how much they earn, how much enters their bank account monthly, how much is spent monthly, they do not understand more in-depth issues. Take the time to properly understand and know the exact duration needed to pay off your mortgage or how long you can survive should your main source of income be cut off. In addition, should you or anyone in your family be hit with some medical adversity, know what is covered and what is not covered by your insurance. Knowing the nitty gritty of your financial position will avoid giving you a rude shock should anything adverse happen.
Cash is king
If you are anticipating a recession, the prudent strategy is to shore up on more cash than on hard assets. Cash in this case means cash could mean the bank balance you have and funds which you can liquidate with minimal costs or losses. During a recession, cash is important for two main reasons. The first is that real estate, stocks and bonds and other financial instruments can lose its value very quickly overnight and you could incur losses should you need to liquidate those assets. Secondly, during a recession, there could be cheap and undervalued assets such as auction houses, beaten down blue chip shares etc. Therefore, you could very quickly snap up such assets if you have ready cash.
Invest in cash generating assets
Cash generating assets by definition are assets that are able to provide some form of periodic cash flow to the asset owner. This includes having a rental property, owning strong dividend paying stock, having cash in fixed deposits and holding bonds with good coupon payments. Typically, assets with good cash generating abilities are able to hold their value and even appreciate during a recession.
Continuing your insurance payments
In developing countries in particular, having personal insurance coverage is considered a luxury. As with most luxury products, it will be one of the first to be cut when times are tough and cash is scarce. However, if possible, try to avoid defaulting on your personal/medical insurance coverage as the cost of healthcare can be exorbitant. Medical expenses are one of the causes for bankruptcy in the country and the last thing you want happening during a recession is your cash going towards medical expenses.
Refinance your high interest debts
If you have debts such as credit card debts or personal loans, be sure to try to reduce the cost of these debts. Shop around or ask your local bank on how to reduce the interest costs to these debts. There are a number of ways this can be done. You can refinance those debts with new debts which are lower in interest rates (just make sure that the refinancing fee is not greater than the interest savings you can get). Or, you can consolidate all your outstanding debts into a single debt which yields an overall lower interest costs.
The key to note is that during a recession, the value of your assets could potentially erode. Therefore it is imperative that you protect your financial position the best you could to avoid any shortfall in cash flow and subsequently, a steep reduction in the quality of life during a recession.