14 May 2020

How to prepare your finances for a recession

Here's what to do with your debt, savings, investment portfolio, mortgage and your super before and during a recession.

A recession or any kind of market downturn can be a scary time as unemployment rises, incomes fall and bills continue to come in. But there are things you can do to prepare. Doing a general tidy up of your finances now and getting a plan in place can save you a lot of money, time and stress down the track.

Focus on paying down your debt

Having a plan in place to pay off your debt is always important, but it's especially vital prior to and during a recession. There's a higher chance of being made redundant or having your hours cut back at that time, which could make it really difficult to meet your repayments.

When starting to pay down your debt, you should prioritise some debts over others.

Credit card debt and personal loans

If you have credit card debt or a personal loan, it's a good idea to focus on paying these off first. These products typically charge a higher interest rate than other credit products. While you might have this debt under control now, these could become difficult to pay down if you were to suddenly lose your income.

A balance transfer credit card allows you to transfer your debt over to a new card with a low or even 0% interest rate for a set period of time. Using a balance transfer credit card could save you money on interest and also help repay your debt quicker.

If you have several personal loans, you could consider combining these into one with a debt consolidation loan. This means you're not paying multiple sets of loan management fees.

Student debt (HECS or HELP debt)

This debt is less urgent, as you're not charged interest and it's simply indexed each year for inflation. This debt starts to be paid from your salary automatically once you earn above the income threshold, and it's taken from your pay before it even lands in your account (much like tax).

Because the inflation rate is so low right now, there's no urgent reason to rush into paying this off. If you've got money to spare, it's much more worthwhile to pay off any high-interest debt you have first. Once this is paid down, you should use any remaining money you have to start building up your emergency savings.

Build up your emergency savings

In times of economic uncertainty, it's really important to have some cash savings at hand. This is especially essential if you're a casual worker. If you're made redundant, you could face unemployment until the economy picks back up. This means no money is coming in, but you'll still need to meet your regular bills and ongoing payments.

Also, in times of economic uncertainty, we usually see big falls in the value of stocks and other assets, so cash is a much safer and less risky option.

While no one can predict how long a recession might last, as a general rule, it's a good idea to build up an emergency savings fund of three to six months' worth of living expenses. This means the amount you should aim to have saved will be different for everyone.

Here's how to start building up your emergency savings.

Calculate how much you need to save

The first step is working out how much you need to have in your emergency savings. This means calculating three to six months' worth of living expenses, which can sound daunting. A good way to tackle it is to look back on your transaction history over the last few months and make a note of all your living expenses. (Bonus tip: if you use the Finder App, it will automatically categorise many of your major expenses.)

Common examples of living expenses include the following:

  • Electricity, gas, Internet and phone bills
  • Mortgage repayments or rent
  • Health insurance payments, regular prescriptions and medication
  • Groceries
  • School fees, uniforms and supplies
  • Public transport costs, petrol and car registration

Keep in mind that living expenses means the things you buy that are essential to your day-to-day life, so things that are in the "wants" rather than "needs" category aren't included.

Examples of costs that usually aren't living expenses include the following:

  • Eating out and takeaway foods
  • Gym memberships or personal training (unless for medical/rehab purposes)
  • Alcohol
  • Entertainment costs like Netflix, Stan, Spotify or movie tickets
  • Holidays and travel

Create a budget and reduce spending

Once you've worked out your average monthly living expenses, it's time to put together a budget. Let's say you've figured out you need $2,000 a month for living costs, and you want to save up an emergency fund of four months' living costs. That's $8,000 you need to have in your emergency savings. How are you going to save this?

As a starting point, you need to trim your spending. It's likely that going through your past transactions has revealed some spending patterns you didn't realise you had. Perhaps you discovered you were spending more money on eating out than you thought you were? Or maybe you were surprised by how much money you spend each month on various streaming services? Work out where you're currently overspending and start to cut this down.

If you need more inspiration, here are 50 practical ways to reduce your spending and save money.

Save on your essentials

Some bills are unavoidable. Whether it's car insurance, home insurance, utilities bills or your phone plan, certain expenses just aren't going away - but you might be able to lower them. This can play a big role in reducing your spending.

Car insurance: We collected quotes from 12 well-known car insurers and found the cost of insurance can vary by more than $400 a year. Compare car insurance regularly, and you may be able to make a major saving.

Home insurance: Shopping around for your home insurance can also lead to big savings. We sought quotes from 8 different insurers and found a difference of $1,335 a year for the same house.

Health insurance: Are really making the most of your health insurance? If not, consider reducing your level of coverage. You can compare prices and benefits online to find a policy which best suits your needs.

Life insurance: Cheap life insurance does exist. Reconsider the payout amount you really need or look into cheaper providers. We found customers could save over $100 a year just by switching.

Utilities: Whether it's your electricity, gas, broadband, or phone bill, you might be able to bring the cost of your utilities down by comparing providers online.

Increase your income, if you can

While you're actively trying to reduce your spending, try to find ways to bring in more money if possible. This is especially important if you've already been following a budget and don't have many opportunities to reduce your spending further.

Here are a few options to increase your income:

  • Ask for a raise. If you haven't asked for a raise in a while, it could be a good chance to do this now. If you can pull together a solid case as to why you deserve an increase, you won't lose anything by asking.
  • Do part-time work. You could try to pick up some weekend shifts in a cafe or bar near you or do some freelance work after hours. You could even drive for Uber, rent out a spare room or start a side hustle.
  • Sell things. Sell items you no longer use or need on eBay, Gumtree or Facebook Marketplace for some extra cash.

If you need more inspiration and ideas, here are 22 ways you can make some extra cash.

Put your emergency savings in a safe place

Once you start building up your emergency savings, it's important you have a safe place to put it that's earning you a bit of interest. Here are a few options:

A high interest savings accountSavings accounts pay a small amount of interest on your balance. They often offer bonus interest when you can deposit a certain amount each month as an incentive to save. One benefit of a savings account is that you can access the money instantly if needed.

Compare savings accounts

A term depositTerm deposits are a type of locked savings account. The benefit of term deposits is they pay a fixed interest rate that won't change for the life of the term. However, you can't access your money instantly if needed.

Compare term deposits

Deposits up to $250,000 in savings accounts and term deposits with Australian banks are protected by the government, so if something were to happen to the bank (which is unlikely), your deposit would be safe. This is part of the Australian Government Guarantee Scheme.

READ MORE AT : https://www.finder.com.au/prepare-your-finances-recession

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