How to Tackle Your Finances During a Recession

A stable economy and market don’t last forever. There are several external forces at play that can dramatically change market behavior. Safeguarding your finances from a recession is, therefore, not just a strategic move but a necessity. The more prepared you are, the better off you are getting through a lean phase. Wondering where to start? Here’s everything you need to know about safeguarding your finances during a recession:

1 – Don’t spend mindlessly 

There’s no better time than right now to cut down on your non-essential purchases. With the proliferation of online shopping, it has become too easy to keep buying all the time, even when you don’t need anything. This can be a massive sinkhole for your money, and getting a grip over your spending can help you tide over a recession. Moreover, since essential expenses such as rent, utility bills, and loan EMIs are non-negotiable, cutting down on non-essential spending is the smartest way to keep your finances in check.

As a rule of thumb, don’t spend more than 30 percent of your net income on non-essential items. And the lesser you spend, the better it is for your overall financial health. 

2 – Build an emergency fund 

An emergency fund is an umbrella you need to survive rainy days. Apart from inflation, recession can also result in layoffs, and you don’t want to be in a position where you have no savings to dip into in the absence of a regular paycheck. 

Make sure to work towards creating an emergency fund that covers at least six months of expenses. It may look like a huge number, but every bit counts. Start small but make it a consistent habit. It is also important to review how you want to build your emergency fund. Don’t solely rely on cash savings — invest a part of the money into instruments that retain the liquidity and provide you easy access to cash whenever you need it. 

If you are not sure about your investment options or need guidance about picking instruments that are best suited to your goals and risk profile, reach out to the experts at Moneyfront. 

3 – Avoid making impulsive decisions 

When you witness the market nose-diving, it may be very tempting to offload your investments. But that’s a rookie move — financial experts believe that short-term events like a recession shouldn’t drastically change your long-term investment strategy.

 Sometimes, a recession can provide a massive buying opportunity that can work to your benefit. It is important to weigh your options before you decide on your next step. For instance, it is not a wise decision to stop your regular SIPs. When the prices are low, it is easier to accumulate better returns. 

When the markets are weaker, the NAVs of mutual funds go down, providing your more units for each SIP. Once the market bounces back, the higher accumulated units can help you to build a bigger corpus.  In the event you stop your SIP, you may find it difficult to recover your losses when the market recovers. At the same time, steer clear of extremely volatile mutual funds. When the market is experiencing a recession, the safest bet is to stick to stable mutual funds. Opting for hybrid funds that provide better asset diversification is also an option you can explore. 

4 – Have a debt strategy in place 

If you have borrowed debts, a recession can put a strain on your finances. In the unlikely event, you are unable to repay your debts, leverage your past repayment record and relationship with the lender to ask for an extended repayment period.  In most cases, lenders are more likely to agree to your request as banks want to avoid taking possession and getting into litigation for loan recovery. The earlier you approach the lender and chalk out a debt restructuring plan, the better it will be for your finances. It will also provide you peace of mind and stop you from stressing about what you can’t control.

5 – Don’t opt for investment in real estate

Parking funds in real properties is a preferred option for several investors to tide over the rough times during account of the recession. However, the real estate market hasn’t been faring too well during the recession. In most cities, the price of property has plummeted on average. Even in the case of appreciation, it has been marginal. When there is a potential slowdown, it is unlikely that the real market estate will spring back immediately. 

6 – Don’t panic unnecessarily

When it comes to personal finances, panicking never helps. Even if there is a recession. It is hard to predict when the market will face a lean phase and it is impossible to prevent it. And if recessions were easy to predict, policymakers would be already doing that. So the best course of action during a recession is to keep the focus on your existing investments and wait for it to end.

Carefully assess your options and speak to your financial advisor if you are not sure how to move forward. Your only goal should be figuring out how best you can protect your finances. A little bit of strategic planning can go a long way in helping you overcome the rough waters and get back on track.

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