Eight ways to prepare your finances to thrive during a recession

Review your budget, contribute more to an emergency fund, pay down high-interest debt and diversify investments, experts say

Reviewing your budget and reducing expenses can help you to save more money for emergencies during a recession. Alamy

Recession concerns are growing worldwide amid mounting inflationary pressures, monetary policy tightening by central banks and the lingering effects of the Covid-19 pandemic.

The Institute of International Finance warned last month that the risk of a global recession is “rising sharply” amid a combination of shocks, including the effects of the Russia-Ukraine conflict on the eurozone, Covid-19 pandemic-related uncertainty in China and a gloomy outlook for the US economy.

The global economy, meanwhile, is projected to grow 2.3 per cent in 2022, compared with an earlier 4.6 per cent estimate, the IIF said in a May 26 report.

The International Monetary Fund also cut its growth forecast for the global economy to 3.6 per cent in 2022 and 2023.

More than 60 per cent of chief executives globally say they expect a recession in their primary region of operations before the end of 2023 or earlier, according to a June survey by US non-profit organisation Conference Board. Fifteen per cent of chief executives say their region is already in recession.

About 78 per cent of US employees fear losing their job during a recession, according to another June survey by staffing company Insight Global, which polled 1,000 workers.

Fifty-six per cent of American employees said they were not financially prepared or “don’t know how to prepare” for a recession, the survey found.

We asked personal finance experts for their advice on how consumers can prepare for a recession.

1. Reassess your budget

If you’ve never had a budget — or have one you never consult — either create one or review the one you have, says Steve Thompson, partner and financial planner at GSB Capital.

Knowing where your money is going helps you to prepare for and adjust to tough times ahead, he says.

“Start by looking at how you spend your money and figure out what you can cut out entirely — do you really need that monthly subscription to three gyms?” Mr Thompson says.

Evaluate your budget every month to see what expenses can be managed better or removed altogether, he says. There are plenty of spreadsheets online that can help with this.

Think about where you want your budget to be for a worst-case scenario and a best-case scenario and only buy what you really need. By reducing your spending, you’ll have money to prepare for a possible recession in other ways, he says.

Distinctly classify your expenses into needs, wants, and luxuries, says Damodhar Mata, a financial adviser in Dubai.

“Try to reduce your wants and luxuries to reduce your expenses. If possible and necessary, downgrade your lifestyle by a notch or two,” he says.

2. Contribute more to your emergency fund

Expect disruption to your business income or professional income during a recession, says Sharad Nair, executive vice chairman of Abalone Capital.

“It is critical to keep a minimum of 20 per cent and preferably 30 per cent of your net worth in cash as emergency funds,” he says.

“Pay attention to increasing your savings before an approaching recession. Check options of low-cost borrowing using your insurance-linked portfolio or personal investment portfolio for emergency funds.”

It is recommended to have a minimum of three months’ salary or living expenses and up to six months, where possible, in your emergency fund, Mr Thompson says.

“Try not to be overwhelmed in thinking about reaching that target, it might take a little longer to get there but that’s OK,” he says.

Even when a recession is officially announced, the real impact takes a while to set in, Mr Mata says.

Use this time to stock up on money to manage emergencies, a potential layoff or reduction in salary, he says.

Once you’ve slimmed down your extra expenses, build your savings account balance over the next few months by setting up an automatic transfer on a regular basis, Mr Thompson says.

“If you lose your job or have car troubles, you’ll have an emergency fund there to help you out. And if you end up not needing it, at least you’ll have a nice nest egg that you could use in any emergency in the future to cushion any further issues down the line,” he says.

3. Pay down high-interest debt

If you leveraged a credit facility to enhance your investment portfolio yields, this should be reduced to avoid margin calls, Mr Nair says.

Also keep your credit-card spending in check, he says.

“Keep an adequate cushion to pay home loans, personal loans and car loans. It is best to avoid leveraging in a high interest rate environment,” he says.

Pay down credit-card debt or any high-interest-rate debt you have. If something were to happen to your job, you’ll feel less under water if you owe less money overall, Mr Thompson says.

“Charging to a credit card should be a last resort since the interest rate is high, but it could dig you out of a hole. If you’ve paid down your credit card, you’ll owe less and have more money available to put towards your emergency fund,” he says.

Cash is king, Mr Mata says. Accumulate and hold as much cash as possible and keep it in an easily accessible interest-bearing account.

4. Enhance your employability

Learn Arabic or another language or skill that is in demand in your industry to make your position more valuable to your employer, Mr Mata says. Add more value to your employer and clients, making them think you are irreplaceable.

“Read non-fiction and self-improvement books to enhance your confidence and widen your knowledge,” he says.

“Enhance your professional image by improving your social media presence and by connecting and engaging with thought leaders in your industry.”

5. Review financial weaknesses

This is a good time to keep a check on your spending habits, Mr Nair says.

Consumers must look to plug leaks of income such as their home internet plans, cable subscriptions or weekly grocery expenses, he says.

It is also a good time to educate young children on spending habits for their future financial security, he adds.

6. Maintain your usual investments

Whether you already have a pension or investment portfolio in play, try to maintain your budgeted contributions, Mr Thompson says.

It can be intimidating to put money into investment funds while a recession is looming, but keeping up with these can benefit you in the long term, particularly when you are investing regularly, he says.

Families hunt for bargains amid rising prices globally — in pictures

“Remember that investing in the stock market is a long-term game,” Mr Thompson says.

“Also, during volatile times, try to avoid checking your performance each day to stay at ease with your future goals in mind.”

If the market takes a turn for the worse — the first half of 2022 was one of the worst since 1964 — consider riding it out for any upswings, Mr Thompson says.

“You don’t want to exit an investment strategy at the wrong time or price point,” he says.

7. Diversify your investments

It is critical to check your portfolio across insurance-linked investments and direct investments, Mr Nair says.

Diversifying your portfolio into assets such as equity, fixed income, real estate and cash instruments will reduce the effect of a recession.

Improve surveillance on the portfolio and stay invested, he says.

8. Spot and grab opportunities

A recession is the best opportunity to buy assets because you will find abundant distress sales in the market.

“This purchase could be a house, car, watch or equities in the stock market,” Mr Nair says.

“Except depreciating assets like cars, most assets would provide phenomenal appreciation once the recession has ended.”