How to be ready for a recession

Reduce pending debt, set up an emergency fund and invest in a diversified portfolio

Shrinking your debt overnight is easier said than done, but ensure you have an emergency fund. Getty

The world has undergone four major recessions since the 1950s, the most recent of which was the longest economic downturn since the Second World War.

In the year following what is now infamously referred to as the Great Recession, economic activity declined in half of all countries around the globe and the after-effects included rising unemployment rates and a reduction in wages — even in some of the most advanced economies.

While official global growth in 2022 is recorded at 3.6 per cent and contradicts any sign of a decline that previous major recessions indicated, there is a 98.1 per cent chance of a world recession looming on the horizon, according to Ned Davis Research.

The recession model has only ever cited such a high probability during the 2008 financial crisis and in 2020, amid Covid-19.

Many countries are only just recovering from the aftermath of the pandemic, while some are still struggling to find their feet.

Fears of a looming recession are the last thing anyone wants to hear about but if one is lurking around the corner, taking strategic steps towards being prepared is the best course of action.

Be prepared, but not scared

In the early 2000s, Amazon sold $672 million in convertible bonds to secure its financial position. About a month later, the dotcom bubble burst. More than 50 per cent of all digital start-ups were forced to shut down over the next few years.

Amazon’s decision to deleverage when it did, ultimately enabled the company to become the global powerhouse that it is today.

Whether you are an individual, couple, family or corporation, being prepared today will translate to your success tomorrow.

By reducing any pending debts, without incurring additional ones, a recession will be less intimidating to deal with.

Selling off liabilities such as cars, delaying major purchases and cutting down on holiday spending will increase your cash flow so that you can deal with a looming crisis.

Alternatively, you can also take smaller but still effective steps by spending less on “luxuries” such as premium coffees and online subscriptions to keep cash in your pockets — if you practice delayed gratification, you will be better off.

Be conscious of contingency

Shrinking your debt overnight is easier said than done.

If you are unable to off-board a mortgage plan or instantly rid yourself of student debt, then the next best thing is to ensure you have an emergency fund.

This is the cornerstone of good financial planning and in addition to offsetting the effects of a recession, it is also helpful in dealing with other unforeseen circumstances such as a serious illness or a change in personal circumstance.

The size of your emergency fund will depend on your lifestyle and associated variables, including income, costs and dependents, to name a few.

With so many moving parts, a general rule of thumb is to stash a minimum of six months’ worth of expenses, but remember that this isn’t a nest egg for a long-term savings plan or a holiday. It is a safety net that should only be tapped into in the event of an emergency.

Furthermore, work on building a profitable fund that is liquid with unfixed terms.

Over time, this allows you to easily have access to cash flow and to reinvest it when opportune moments arise so that you can, over time, save up your yearly expenses by 20 times more to become financially free.

Be a savvy investor

If you have successfully mitigated your risk by lessening or eliminating debt and pulled together some emergency savings, it is time to think about the future.

The market is expected to remain volatile as professional investors assess recession odds.

It could take some time for stock prices to bounce back from the market’s sell-off of more than 17 per cent in the year to date.

This makes it an opportune time to invest money that you can do without for the next few years, as it can allow you to build wealth for longer-term goals such as retirement.

Stocks, bonds and real estate investment trusts are some of the many available avenues you can pursue to secure your financial future amid the projected 2023 recession.

The bottom line is that a recession will affect all of us in one way or another, but a little preparation upfront will help you to sleep easier and be advantageous in the long run.

Bas Kooijman is the chief executive and asset manager of DHF Capital, a securitisation company for financial services