There’s much discussion at the moment around the R-word, recession, and whether Australia is going to enter a recession at some point in the next year or so.
You know interest rates are being ratcheted up very quickly and that’s starting to put pressure on household spending. We’re starting to see more companies let people go as interest rate pressure hits businesses as well.
Here are my five tips to prepare financially for a recession – if it hits.
1. Emergency fund
Make sure you’ve built up an emergency fund or have a cash fund for you and your family.
In a recession, jobs will probably not be as secure as they have been and we’re in a world where low interest rates have led to employment or unemployment being low as well.
What is likely to happen over the next year if we get towards a recession is that unemployment will start to increase and businesses will start to let people go.
Having an emergency fund to cover a period when you’re out of work will be important.
An emergency fund is also important to cover increased interest rates through your mortgage or increased living costs.
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Also, try to pay off any high interest debt. If you have debt on credit cards or personal loans, see if you can reduce the amount owing as soon as possible.
2. Secure employment
Think about where you’re working and whether it’s secure work that can see out a bad dip in the cycle.
In previous recessions in Australia, a lot of companies went bust or needed to let people go. Research shows that if interest rates increase further in Australia, something like 34 per cent of companies may be zombie companies. Zombie companies are those that can’t afford to pay off their own interest on their debt. Now is a good time to consider where you’re working.
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Also, keep honing your skills to use later in your career when things may be quieter in the business.
3. Don’t overextend yourself
Now is not a great time to take on a lot more debt or make big purchases that aren’t necessary.
It doesn’t mean people can’t go on a holiday or enjoy themselves, but the cost of financing, let’s say a car, will only increase.
4. Make sure you’re diversified
In a recession, it’s quite possible that some asset prices will fall a lot. And some will be worse than others.
Making sure your investments are spread across as many assets as possible will help you withstand a recession and insulate your net worth.
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Assets such as gold are good insulation mechanisms because they have typically done well in a recession.
When our domestic currency has depreciated and in periods where there might be high inflation and high interest rates, having some buffer assets in your portfolio will help. And diversification generally across lots of different stocks, sectors and countries will help to reduce the impact of market falls if that happens.
5. Give yourself the opportunity to invest
If there’s a recession, a lot of people will be under financial pressure and there will be great opportunities to invest, whether it’s in the share market or in property or other places.
During recessions or downturns, we’ve some amazing bargains and people who can take advantage of those lower prices will set themselves up well for the next positive cycle.
Chris Brycki is the founder and chief executive of Stockspot and has been vocal in calling out industry ‘Fat Cats’. He was an inaugural member of two advisory committees for industry regulator ASIC, and was previously a fund manager at UBS.
Are you banking on a recession or do you think Australia is safer than many countries? What tactics are you employing? Why not share your thoughts in the comments section below?
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