Financial Tips To Survive A Possible Recession

Financial Tips To Survive A Possible Recession

Recent data out of the U.S. have brought the possibility of a recession to the fore, and this, along with the weakening global economic performance, has increased downside risks for the local economy. Many major economies, including Canada, the U.S., the U.K., and the Eurozone, are forecasted to fall into a recession over the next 12 months amid the tightening monetary policies, rising living costs, and falling consumer confidence. Using the informal measure of a recession, the United States is already considered as being in a technical recession, following the second consecutive quarterly decline in its output levels[1] in Q2. However, according to Bloomberg, the National Bureau of Economic Research (NBER), which is responsible for officially declaring a recession in the U.S. space, does not believe that the conditions reflect a recession because, while indicators such as personal income[2], consumer spending[3], employment[4], wholesale & retail sales[5], and industrial production are slowing, they are still expanding. Should the U.S. enter a recession, there could be a downturn in demand for Jamaican exports, remittances, economic growth, and employment. However, U.S. service consumption continues to expand, a positive signal for the local tourism sector, which is currently a major driver of local growth and employment. While the timing and likelihood of a local recession are unknown, considering the economic impact that it could have on individuals, such as job loss, reduced consumption, investment, and debt servicing capability, among others, it never hurts to be prepared. Below we will discuss three financial tips that can help you plan for uncertain times and mitigate the general financial or economic toll of a recession on your financial wellbeing.

1. ? ??? Have an Emergency Fund

When the economy begins to deteriorate, your employment and income could be jeopardized, which makes the accumulation of an emergency fund even more critical when preparing for a recession. Setting aside additional funds monthly will put you in a position to cover the financial surprises that may arise during this period of uncertainty. Most experts recommend saving three to six months' worth of expenses depending on how well you manage your finances. This can be saved or invested in money market instruments that will ensure high liquidity or that your funds are accessible when needed. Having cash, separate from your primary savings account, saved or invested in liquid assets in this high-interest environment, will allow your money to retain some or its full value in times of an economic downturn. You will also maintain the liquidity needed, reducing the need to borrow especially as credit availability tends to dry up quickly when a recession hits. Although using your emergency money in times of need is advised, it's crucial to keep in mind that you should replenish your emergency fund as soon as your financial position stabilizes.

2. ? ??? Establish a Budget and Pay Down Your Debts

Maintaining good financial standing or credit by making timely and full payments to service your debts is always important, but during a recession, despite your best efforts, it may not always be possible to do so. Extended periods of job loss can put you in a position where you may be unable to meet your monthly debt obligations. Consequently, it is important to reduce or pay off your debt where possible before the recession hits, so expenses become more manageable if your disposable income is affected. The first step in properly paying off your debts is to create a budget that precisely shows the money that comes into your household, and its possible outflows. Therefore, having a budget can help you identify areas that require a more frugal lifestyle, which supports adequate debt repayment. Although you might be able to make payments today, carrying a heavy debt load during a recession when jobs are scarce makes it hard to meet daily expenditures, let alone debt repayments, and might lead your debt to spiral out of control. Being heavily indebted puts you at risk since even a small change in your financial circumstances might adversely impact your capacity to make payments. Even if you retain your job and can make payments right now, your bank may increase interest rates on your outstanding debt, given the sharp increases in interest rates by the Bank of Jamaica since last year. Increases in interest rates on your loans will increase your monthly debt service payment, which could be a challenge, especially if you were already on a tight budget.

?3. ? ??? Diversify Your Income and Investments

An economic downturn can hit companies, individuals, economies, and financial markets hard. As such, you should protect your investment portfolio returns and maintain an adequate consumption level through a sustained income stream. To limit portfolio losses from the falloff in financial markets during a recession and even log some gains, diversify your investments. With riskier assets, such as stocks, tending to lose value during an economic downturn, holding only one asset type or assets from one sector could result in significant losses. A diversified portfolio also stands a better chance of recouping losses sustained in a recession during the subsequent economic recovery. To diversify, spreading your investments across stocks, bonds, real estate, and alternative investments, as well as across countries and industries, is key to reducing your portfolio's vulnerability. During this period, it is crucial to invest in defensive industries like utilities[6], consumer staples[7], and health care[8], whose products and services remain in demand irrespective of economic fluctuations. Additionally, diversifying your income stream will also put you in a stronger financial position. Having multiple sources of income gives you beneficial sources to fall back on to help keep you afloat if one income source starts to dwindle or gets eliminated. Outside of your primary job, you can get paid to do your hobby or what you are good at, such as teaching, art, math, etc., or choose to sell a product, or engage in digital marketing, among other activities, to earn secondary incomes.

Therefore, taking the steps outlined above can help to recession-proof your finances but also will improve your preparedness for other financial and economic uncertainties and surprises, even if a recession does not materialise. Being prepared will reduce the panic and pessimism that may come with unpredictability, allow you to sustain the same or close to the same standard of living, and give you the clarity to take advantage of the investment opportunities that could present themselves when asset prices decline. While it is still early to predict a local recession, they are a part of an economic cycle, which will be followed by an inevitable upturn in the economy. Therefore, it is best to position yourself to better navigate the risks, help preserve your capital, and position your portfolios to profit from the recovery.

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[1] The Bureau of Economic Analysis' advanced estimate of GDP showed a decline of 1.6% in Q1 and 0.9% in Q2.

[2] According to the Bureau of Economic Analysis, personal income increased $133.5 billion, or 0.6% at a monthly rate. The increase in personal income primarily reflected increases in compensation and proprietors’ income.

[3] Consumer spending increased $181.1 billion, or 1.1%t, in June, according to The Bureau of Economic Analysis.

[4] According to Forbes, year-over-year job growth stands at 4.31%, the largest gain in almost 40 years.

[5] Retail sales in the US jumped 1% m-o-m in June of 2022, beating forecasts of a 0.8% gain, and recovering from a downwardly revised 0.1% drop in May, according to Trading economics.

[6] Water, gas, and electric utilities are needed in all phases of the business cycle, hence the demand irrespective of economic fluctuations.

[7] Consumer staples are everyday products that are still bought even in recessionary times. These include companies that manufacture food, beverages, household and personal products, and packaging.

[8]Health care and medicine are always important to people. Health care includes hospitals, pharmaceutical companies, manufacturers of medical equipment & supplies, and long-term care facilities.