Pretty much everywhere you care to look, the message is all about economic doom and gloom. The prices of food, petrol and many other essential goods continue to rise, putting pressure on our wallets. House prices are falling, with further salt being rubbed in the wound by rising mortgage rates, giving those who are coming (or about to come) off lower one-year fixed deals a nasty shock. Meanwhile, NZ and global share markets have taken a beating, which is showing in most New Zealanders KiwiSaver investments.
Unsurprisingly, most experts think that the NZ economy is probably heading for a recession. In fact, many commentators and economists are spouting (almost gleefully in some cases) the Kiwi economy is already technically in the midst of a recession.
Yet, in those stories about a recession, there’s almost always a key part missing: what does it practically mean for me?
A recession probably means a higher unemployment rate, which means more job uncertainty for many people and a little bit more difficulty finding work for anyone who becomes unemployed. For those who keep their jobs it might mean wage freezes, and for small business owners, it could mean significant disruption to cash flows, if that’s not happening already.
To help, here is a checklist of eight things you should be doing to navigate a recession.
1. Keep calm about the temporary state of your retirement savings and other investments
During an economic downturn, many investments will decline in value, which might set off worries about investments you have established for retirement or other purposes – perhaps your children’s education.
Instead, remember that your investments were set up in the first place with an understanding that markets will sometimes fall in value. Part of the nature of investing is that sometimes values fall, and that’s okay.
If the rest of your life is financially stable, consider increasing your contributions to investments such as shares or funds, or even making bolder moves such as buying an investment property if you can. Current depressed values can be a great time to invest more. Why? Because investment values have always gone on to eventually reach new highs. One of the best things you can do for your retirement is to buy as many investments now as you can as far in advance of retirement as possible – because their value trends steadily upwards with time – and current low values provide you with a great opportunity for doing so. This includes ‘buying’ shares via investments such as KiwiSaver and managed funds, and usually also applies to other investments such as property when they fall in value too.
2. Think wisely and resist the 'urge to splurge'
The borders are open, travel restrictions are lifted, and we’re all being bombarded with an array of offers, discounts, and deals. Instead of being lured by such temptations, take time in advance to carefully consider if there is anything you need. Then double-check to ensure this is based on your needs and not wants. Giving careful forethought to any expenditure will ensure you’re being deliberate about any spending decisions that need to be made.
Of course, if you’re financially able to do so, perhaps you’d like to make a deliberate decision to ‘shop local’ to assist small businesses in your local area? (For example, an occasional coffee at a family-owned café). If this is the case, ensure you still give careful forethought to any spending decisions.
3. Check your credit rating (“credit score”) and get it in good shape
Your credit rating affects more than just your ability to borrow money. For example, many jobs will check your credit rating before hiring you, as your credit score is seen as providing a good snapshot of how reliable you are. Of course, if you need a loan for any reason, then you’ll also be the subject of a credit check.
Therefore, as a recession nears, it’s a good idea to do a basic credit check-up and take care of any blemishes that might appear on your report.
To check your credit score, you can usually do so online for free using one of the three Kiwi providers; Credit Simple, illion, and Equifax. When you get your report, ensure you thoroughly check it for accuracy. This includes seemingly harmless but inaccurate information. If anything is wrong you can ask the credit reporting company to correct it, each company has their procedure for this.
People say that you shouldn’t worry too much about your actual credit score – that’s because there are so many variants of how a credit score is calculated. Focus instead on having a healthy and accurate credit report, as that will ensure a healthy credit score regardless of how it is calculated.
4. Cut back spending on non-essentials and bills
The single most effective thing you can do for immediate impact is cutting back on your spending. Cutting spending results in more money in your pocket, and those immediate rewards can be used to accomplish many of the other things on this checklist.
When people think of “cutting back,” they almost always think of the products and services and experiences they care about most, and that can result in negative feelings about the entire idea of trimming expenses. Instead, the key when it comes to cutting spending is to focus on unimportant and less-important spending.
An emergency fund is simply a pool of money you’ve set aside for contingencies of any kind — perhaps a job loss, a car problem, an unexpected family issue, illness, and so on. Having a readily available pool of money to counter those events makes them much easier to handle, and this is never truer than during an economic downturn.
Debt payments can often be some of our biggest monthly expenses, so paying off debt is a no-brainer. These expenses can also be frustrating to repay when you’re struggling to pay your other bills and support yourself. Consumer debt, like credit cards, should be your top priority. This is especially true because you normally can’t request to defer your credit card payments if you lose your job or come under some other kind of financial hardship.
Note that debt repayment only works if you keep your spending below your income level. If you spend more than you earn, then you’re accruing debt, and it’s likely high-interest credit card debt. Repaying debt is valuable, but it must follow cuts in your personal spending.
7. Maximise your professional value
One of the biggest personal finance risks during an economic downturn is the risk of job loss. Losing your job can cause a lot of short-term economic pain and can lead to a lot of long-term economic consequences, too.
To recession-proof your life, one of the best investments you can make is elevating your education and employability. During recessions, the unemployment rate for those with few or no qualifications is much higher than for those who have built up qualifications. Make the most of this by ensuring that you have some training and skills that are broadly employable.
Ask yourself the following questions:
• Do you have a reputation for being a valuable, efficient, and reliable contributor to your workplace?
• What skills are most in demand in your field of work?
• What transferable skills do you have? – skills that might apply to other fields.
• If you were to suddenly need another job like your own, what traits, qualifications, or experience would companies that might hire you be looking for?
• What additional training could you do to make yourself more employable and/or promotable? Particularly if it’s available through your current job.
• Do you have a good network of professionals who might be able to assist or provide advice?
• When did you last look at your CV? – Ensure it’s up to date with all your work history, skills, certifications, and other relevant material regarding your career. This makes it easier to immediately roll into a job hunt if necessary and can even attract attention from people who may be seeking people like you.
• Would you hire you?
8. If you’re a borrower, refinance or restructure your mortgage
For more than a decade homeowners benefited from ultra-low interest rates. Now, however, an interest-rate storm is already in full swing.
Widespread estimates indicate more than 60% of outstanding mortgages are either floating or rolling off fixed rates this year. When your home loan comes to the end of its fixed interest rate period, most lenders (banks) will offer you a new fixed rate, or automatically roll the loan onto a floating rate. This type of fix-and-forget arrangement might sound convenient, but it also means you could miss out on the opportunity to refinance your mortgage – which can potentially save you significant amounts of money in the long run or offer other benefits. Instead of taking whatever your existing lender (bank) offers, take the time to shop around and carefully weigh up the pros and cons. If it’s worth it, refinancing is when you transfer your existing home loan from one bank to another, usually for a better overall deal, including possibly a lower interest rate.
How to Recession-Proof Your Finances - The Bottom Line
The tactics on this list are all practical steps you can take to improve your financial situation as NZ likely heads into a recession (if we’re not in one already!). But the unavoidable truth is that many people will read such a list and not act.
The key to success is action. When you turn the things you learn into action, that’s when things improve.
If you’d like to arrange an obligation-free chat to discuss what financial steps from the list above might suit you, and how to implement them, it’d be the pleasure of our team to assist, simply get in touch.
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