We’re living in unprecedented times. With the COVID-19 pandemic, record inflation rates, and the Russia-Ukraine war going on, experts have warned of a looming recession. While the future may look uncertain, preparing your finances in advance can help reduce anxieties and help you survive a recession.
Read on for our top five tips to recession-proof your finances.
What is a recession?
A recession is a significant decline in economic activity that lasts for more than a few months. There’s a dip in the five key economic indicators, including income, real gross domestic product, retail sales, employment, and manufacturing.
Recessions are deemed an inevitable part of the business cycle – here’s what went down during the last five recessions.
Peak Unemployment Rate
|The Gulf War Recession||Jul 1990 – Mar 1991||6.80%|
|The Asian Financial Crisis||Jul 1997 – Dec 1998||5.00%|
|The dot-com bubble/ 9/11 Recession||Mar 2001 – Nov 2001||5.50%|
|2008 Global Financial Crisis||Dec 2007 – Jun 2009||10%|
|The COVID-19 Recession||Feb 2020 – Ongoing|
(as of May 2020)
*Stats taken from Investopedia
1. Reduce credit card debt
If a recession occurs, you’d not want to find yourself unemployed and deep in debt. It’s never too early to recession-proof your finances – start by reducing your credit card debts today. Remember that the bank always charges high interest on your credit card’s overdue amount, together with the outstanding balance. If you can, try paying off your credit card bills entirely every month, instead of merely paying the minimum credit card sum per month.
Find yourself struggling to pay off your credit card bills? Consider cancelling them instead, so you won’t bite off more than you can chew.
2. Draft a spending plan
If you were to become unemployed, you would have to spend your money more prudently.
1. Calculate your current monthly income
Tally your total monthly income by adding up your salary, freelance work, investments, and other sources if applicable. Bear in mind to be conservative with this amount so you don’t risk overspending.
2. Track expenses
Break down your monthly expenses so you can better understand what you spend on. If you have already cultivated the habit of tracking your expenses, simply refer to your past records. Otherwise, start doing so with the Planner Bee app – a one-stop platform to help you manage your money.
3. Cut costs
Look at your discretionary spending to reduce your expenses further.
Perhaps you could be eating out too much. Why not try packing your own meals on days you have to return to the office? This helps you save some moolah, and is usually healthier as well!
To lower your expenses even more, evaluate your existing memberships such as your gym membership, Spotify or Netflix subscriptions. Think about whether you still need them, and cancel them if not necessary.
3. Boost emergency funds
An emergency fund can really help you out on rainy days. While a $100 phone repair may seem insignificant, it can overturn your entire budget or even land you into debt if you are not well prepared. As an estimation, your emergency funds should be able to cover at least six months of your household expenses, and act as a buffer for curveballs that may come your way.
To build your emergency funds, there are a number of ways to do so:
a. Look for a side hustle
Earn some additional pocket money and save up towards an emergency fund with a side hustle. From part-time jobs, internships, freelancing, to tutoring, there are various ways you can earn extra income.
b. Practise putting a small sum of money aside every month
Make saving a conscientious habit. For a start, try the “50/20/30 budget rule”. This rule means that you allocate 50% of your monthly salary to needs, 30% to wants, and 20% to savings.
Over time, this sum will add up and you’d be glad you had the foresight to do so should you require this money urgently someday.
Not sure how to calculate the amount of emergency funds you need? Fret not – we’ve got you covered with our emergency fund calculator.
4. Diversify investments
The best way to hedge against inflation would be to invest. While the stock market is fluctuating, dollar cost averaging would be a good strategy to build long-term wealth. In fact, investing early can be advantageous, since your investments will have a longer time horizon to navigate volatile financial markets.
However, remember to reduce risk by diversifying your investments. Diversification helps you mitigate risks and make sure that your investment portfolio consists of a variety of assets. Most successful investors diversify their portfolio to balance the markets’ highs and lows.
Find out more about the basic rules of investing.
5. Invest in yourself
You are your greatest investment – always remember to invest in yourself to ensure employability. For instance, you could take up courses with SkillsFuture to upgrade your skills. This helps you to remain relevant, with practical skills to make sure you thrive even after a recession.
Other than your technical skills, be sure to work on your soft skills too – especially when it comes to communication. During a recession, stay on top of things by communicating frequently with your bosses and colleagues to ensure things are smooth sailing.
In the unfortunate event that you do get laid off, these skills will come in handy during the job seeking process.
Pro-tip: Craft the perfect resume to make yourself stand out from the other candidates.
Emerge stronger from the recession
A recession might be around the corner, but there’s no reason you cannot survive this – especially with adequate preparation. With these tips to recession-proof your finances, remember to stay vigilant and level-headed, and you will emerge even stronger from this crisis.