Making The Most of Every Dollar:
Ten Tips On How To Thrive In A Recession
The recent news that New Zealand has officially entered a recession, with the economy shrinking 12.2% in the three months to June, is worrying for everyone.
Now is the time to get your finances in tip top shape. From implementing everyday habits to saving strategies, and earning extra money, there are various ways to protect your money during a recession.
As a financial advisor for over twenty years, I’ve seen many clients through economic downturns, helping them weather the storm with practical money planning. For advice tailored to your particular circumstances, don’t hesitate to get in touch.
Here are ten tips on how to thrive in a recession.
- Start an emergency fund
Life is full of surprises. Having an emergency sum of money to fall back on when the unexpected happens is a lifesaver. Perhaps you lose your job, or need to replace a broken washing machine, keeping cash aside in an easy to access bank account means you’re not dependent on borrowing money when times are hard.
Aim to save 3-6 months’ worth of your income. If you’re out of a job, this amount should cover your rent/mortgage, bills, and other essential items whilst you look for new opportunities.
- Create a budget
How many times have you drafted a budget, only not to stick to it?
Using a budget to control your spending is a simple and effective money management tool.
That’s why we offer a free budget planner on our website. Just input your income and expenses and you can easily review what’s essential, and where you can reduce your outgoings.
Try your best to stick to a monthly spending limit and you’ll quickly start to build up your savings.
- Cut your expenses
In a cost-of-living crisis it’s wise to start penny-pinching.
Cut down on luxury purchases and unnecessary spending, things like travel, entertainment, and dining out. Buying clothing and shoes just because they’re on sale is another area to cull unnecessary spend. Take a look at your budget and identify where you can cut costs.
Even just making small swaps to your weekly grocery shopping can make a difference. Do you really need that premium hummus? Or the most expensive orange juice on the shelf? Go for the supermarket’s basic range instead and you’ll substantially reduce your grocery bill.
- Increase your income
If you have a side-hustle that’s fallen by the wayside, now is the perfect time to get it off the ground and start making some additional money.
In a recession it’s possible that your income will suffer because your main source of income, your job, is less secure than it once was. Companies are more likely to restructure and make redundancies when the economy is struggling.
Diversifying your income by adding new streams of revenue makes you less reliant on your job for income. For more ideas about how to earn extra money read our blog post 5 Ways To Create Passive Income.
- Diversify your investments
Having a mix of investments in your portfolio will help you avoid falling into the red.
Investing during a recession can be risky, but if you’re willing to take that on there are still worthwhile opportunities. The best strategy is to diversify your portfolio by investing in different asset classes like property, shares, bonds, cash, and term deposits.
Also, explore recession-proof industries to invest in. Sectors where demand stays relatively constant during most economic conditions such as consumer staples (food and essential items), healthcare, telecommunications, and precious metals, can be safe bets. Just make sure you do your homework or work with a financial advisor to really understand the markets before investing. We can help point you in the right direction for specific investment advice.
- Invest for the long-term
It’s tempting to panic and sell your assets when their value inevitably falls during a recession.
However, you need to remember that economic downturns are only temporary, as the market is cyclical. Wait to sell any assets until the market picks up again. In the meantime, capitalise on other investor’s panic by buying stocks, shares and dividends that are being flogged for cheap.
Hang in for the ride. Your assets will eventually return to their original value, or be worth more, in the future. As always, obtain specific personalised advice from the appropriate investment specialist.
- Keep your credit score high
When all else fails, you may need to turn to your credit card to keep you afloat.
Interest rates are sky-high and credit markets are feeling the squeeze: this makes it harder, and more expensive, to get a loan, mortgage, or take out a credit card.
To remain attractive to banks and lenders ensure you keep your credit score high by paying your bills on time and keeping your ratio of debt to available credit low. If you fall on hard times and struggle to make your payments, communicate ahead of time with the lender and they can help you adjust your payment plan.
- Pay off high-interest debt
Whether you pay off your debt or continue to build your savings during a recession depends on your financial situation.
If you’re financially stable and confident you’ll have enough money flowing in, plus plenty of savings, then it’s sensible to pay off any high-interest debt before interest rates skyrocket even further.
Otherwise, if paying off debt quickly during a recession puts you in a more vulnerable position. In this case, you’re better off focusing on growing your savings and paying the minimum on debt payments (at least for the short term).
- Grow your savings
With a strict budget, low expenses, and additional income you should be in a position to boost your savings and therefore feel more financially secure.
One easy way to guarantee you save money is to set up an automatic transfer every month between your main account, and your savings account. You could have a savings account with a different bank with limited access to it, thus making it difficult to dip into for impulse spending.
If you haven’t already, now might also be a good time to open a Kiwisaver account. The benefit of this scheme is that the government and your employer each make a contribution of 3% of your investment. Bear in mind you can’t access this until retirement, or when buying your first home.
- Improve your skills
Finally, in the spirit of “hope for the best and prepare for the worst” you may want to consider upskilling to make yourself more employable, in case your current job is at risk.
The jobs market is likely to slow down during a recession, with fewer jobs for more job seekers, so it’s essential you have a competitive edge.
Take the time to learn a new skill by taking a training course. And don’t forget to add the certificate to your CV, which you should also refresh.
The key to being financially resilient in a recession is to plan ahead, taking action by reducing your expenses, building up your savings, and finding new ways to make additional money. Do these things, and not only will you survive this challenging time, but hopefully emerge on the other side more financially secure than you were to begin with.
If you’re not sure where to start, or want bespoke financial advice about how to thrive during a recession, we’re here to help. Contact us today.