Inflation is up, the stock market is highly volatile, and GDP growth rate estimates keep changing. Many experts are talking about the recession because of the Ukraine-Russia war or the Credit Suisse bank situation.
We are not in a recession now, but do you know how to protect your money in a recession? In today’s newsletter, we’ll look at how you can survive a recession, so you can feel more confident about your finances.
Estimated read time: 3 minutes and 35 seconds
Buckle up, here we go!
What is a recession?
A textbook definition of a recession is a period with two straight quarters of negative GDP growth.
But we should also look at how the unemployment rate, retail sales, and measures of income and manufacturing are performing for an extended period.
Are we in a recession?
No, not yet.
With currently available data, RBI nor the Government declared anything regarding the recession.
But we have to be prepared for the possibility of a recession. Because recessions are an unavoidable part of the economic cycle.
Also, a recent report from KPMG has stated that around 66% of CEOs in India expect a recession in the next 12 months.
Now, as per NBER data, from 1945 to 2009, the average recession lasted 11 months in the US. We don’t have data for India. So, for now, we can assume the same length of recession in India.
Therefore, it is necessary to understand how a recession will affect you and how to protect yourself.
How can a recession affect you?
A recession will affect every single person in some way. We have already noticed the impact of inflation on the price of basic consumer goods and higher interest rates.
A recession could lead to a job loss or issues with employment (no bonus, reduced compensation, etc.) since companies have to adjust to a decrease in consumer spending.
With less money in the economy, there’s less demand for products & services as people will think twice before spending any money beyond the necessities. Small businesses will be highly affected.
You will experience volatility with your investment portfolios as well. As we have all witnessed during the last 2 years, the stock market reacts strongly to economic news and global conflicts.
How to protect your finances during a recession?
There is no need to panic during a recession if you have executed the basics of personal finance well, like budgeting, paying off debt, investing for retirement, etc. Let’s talk about them.
1. Build an emergency fund
You should always have enough money in the bank to cover six to twelve months of living expenses. Cash is king in these situations, but for that, you don’t have to store cash in-house.
You need to park or invest your emergency fund in liquid investments. We discussed how to park your emergency fund here.
2. Reduce unnecessary expenses
During a recession, you must cut your expenses. So, that you can be prepared for a loss of income. You can start by delaying a major purchase.
Also, you should avoid making common mistakes. Read here.
3. Build additional sources of income
One of the riskiest things you can do during a recession is to depend on one source of income. You need to build more income streams.
We discussed how to build multiple income streams here.
4. Don’t panic about your investments
You should think twice before selling off your investments during a market crash. When you see your portfolio in red, it’s going to be tempting to consider selling everything.
But if you have an emergency fund, and life & health insurance, you don’t need the money for short-term expenses. You shouldn’t dump your stocks due to fear or temporary uncertainty.
If you do, you’re likely selling at a loss. Remember what happened when the pandemic first began? Many investors panicked and ended up losing out on astronomical gains just a few months later.
5. Diversify your portfolio through bonds, gold, and global equity
During a recession, bonds are less risky. Bonds are stable, and you will receive regular interest payments. Remember, only invest in Government bonds or in bonds of high-quality companies.
Stocks will experience high volatility during a recession. But investing in gold and global equity will reduce the volatility of your portfolio. We discussed investing in SGB and US equity here and here.
6. Prepare for a potential job loss
During a recession, companies make layoffs if they’re not generating enough revenue. So, if you haven’t polished up your resume in a while, this could be the time to update it. Update your LinkedIn profile. Keep your eyes open for opportunities.
Should you pause your investments during a recession?
A recession is a normal part of the economic cycle, and it’s not a valid excuse for not investing your money.
Halting your investments is probably the worse thing you could do when the economy is slowing down. When prices are dropping, that’s probably the best time to invest.
Don’t think about timing the bottom of the crash. Simple, SIP is best.
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