If you’ve been worried about an economic downturn or recession, here’s what’s coming and how you can prepare for it.
Headlines in the past few weeks have been dominated by the coronavirus. And with people being asked to work from home, public spaces being closed and hoarding happening, it’s only a matter of time before our thoughts turn away from the virus and towards the economy.
I’ve seen headlines about an impending recession for years. Markets go up and down over time and a correction in the market was always coming our way. The issue with the current situation is that we know unemployment is likely from seeing restaurants and bars unable to open and have staff work in some locations. You get a sense that economic activities where we’d be normally trading cash for services or goods aren’t happening as much. Even our local coffee shop where I’d normally queue for hours was clean out of customers.
But what is a recession?
- A recession is when the economy stops growing and starts to contract. Economic activity takes a sharp downturn on market graphs and we start to experience negative growth in markets.
- For Australia, it’s likely that we’ve tipped into negative growth thanks to the 2020 bushfires and the coronavirus having an impact on our ability to trade goods and services.
- Whether or not that negative growth turns into a recession is based on the performance over a quarter or three months of the year. Before calling a recession, the headlines will often wait for two quarters or 6 months of negative growth.
Downturns have happened throughout history. What goes up must come down and to some extent, market growth will at some point lead to a correction and downturn.
I graduated in the Global Financial Crisis environment where jobs suddenly were thin on the ground. Government departments cut back their graduate programs, corporate jobs dried up and I started my first job alongside many experienced consultants who had been let go from big prestigious firms because they didn’t make the numbers cut. This is a reality many of us have lived through before.
A recession or economic downturn might be inevitable but how you respond to it and survive a downturn up to you.
Here are 5 ways you can prepare now for a recession:
1. Build your emergency fund now
We’ve previously articulated why you need an emergency fund. I am a huge advocate for everyone having an emergency fund because it is the number one ingredient you need to not worry about money. An emergency fund is a reserve of cash that is liquid, which means that you can access and use it quickly when you need it. One thing that living through the last economic downturn taught me is that it affects everyone but it affects you less if you have money to draw on. When jobs in my location dried up, I was able to use my savings from my hospitality job to pay for a move to another state and secure my first job the week after finishing university or college. Having money that you can readily access when you need it will help you survive any downturn.
2. Check your risk profile
Before an economic downturn hits, check where your money currently sits. You’ll likely have a retirement fund (known as superannuation in Australia) already set up. Most retirement funds are geared towards a more conservative or risky portfolio. Check your current fee structure and make sure you’re happy with your portfolio set up. I would then highly recommend not constantly looking at your retirement fund during the downturn as it’s likely going in only one direction: down. Unless you have a good reason to check it, continuing to monitor your retirement fund during an economic downturn will be a form of masochistic torture because you already know the direction it’s heading in. The great thing about this is that the retirement fund will go up again as the market recovers.
Same goes for your investments. Check where your money is invested in the market and make a decision about what you’re doing to do. People will shout at you to hold or sell during a recession. The market always goes up over time if you look at trends over the past thousand years. The most important thing is that you know your risk profile and you’re comfortable with your level of risk.
3. Pay off debt
If a recession is a mountain for us to climb, debt is the rock in your backpack weighing you down. I’m a huge advocate for getting rid of debt because it’s an obligation on our future self, taking away from how we might choose to use assets in the future. You lock future you into repayments and that’s a toxic relationship you can do without.
Not all debts are created equal and it’s important to look at the interest levels on your debt. You’d likely pay the high-interest debt off first because they add up more quickly over time. Make sure you balance paying off debt with building up an emergency fund so that you’re still able to access cash quickly should the worst happen.
4. Prioritise your career development
When I think about the last economic downturn, I remember the consultants and bankers who flooded the job market. They were the golden children who studied the right degrees at uni/college and who had been on lucrative bonuses. And yet even they were turned out of their jobs without much warning and looking for work with the rest of us.
Now is the time to recession-proof your skills. Get networking so that you know people in your field and industries you may want to work with in the future. By networking, I don’t necessarily mean standing in a room and making small talk – I mean making human connections with others who you can support and who in turn, you could potentially draw on for advice or a recommendation in the future. A network is hugely valuable if you need to find a job quickly too.
5. Know how much it costs to be you
Let me ask you a question: how much does it cost to be you each month?
A staggering number of people cannot answer that question. The reason you should know where your money goes each month is so that you can budget in advance and make sure you have enough money to get through the months ahead. The best way to know where your money goes each month is to budget. And we can show you how to budget in 10 minutes.
The markets right now might be in a downward trend but this was always going to happen at some point.
What goes up must come down and the reverse is also true: we will get through this and markets will bounce back at some point. How you emerge from a recession depends on how you prepare for it and we can build the financial habits needed to survive an economic downturn.
Read more: 5 Steps to Financial Fitness