Financial Planning During Recession
5 May 2023
A recession is when the economy takes a hit and declines due to reduced trading and industrial activities. It causes a negative GDP, unemployment, and reduced retail sales and manufacturing activities. Various macroeconomic factors like a sudden economic shock, considerable inflation or deflation, too much household debt, etc., can cause a recession.
Though temporary, a recession might cause a financial loss for households too. That is why, when a recession hits, you need to be careful with your finances.
Haphazard investments for growing your savings, panic redemptions, dipping into your savings, etc., do not help. You need a more holistic approach to your finances, especially in emergencies like a recession, to emerge a winner when the bad phase is over.
Tips for Financial Planning During Recession
Financial planning is always important to strategise your investments and plan for your goals effectively. However, financial planning becomes all the more important in challenging times like a recession.
We have, thus, curated a set of financial planning practices to help you sail through the recession without taking a hit.
1. Examine your expenses.
In a recession, your income might take a hit. If that happens, you need to be extra careful with your expenses.
Disciplined spending and weeding out unnecessary expenses is key
Change your spending behaviour and inculcate financial discipline so you can manage your finances even with a reduced income and find areas where you can tighten your grip.
Prioritise your expenses based on your immediate needs. Identify your "must-pay" expenses like rent, bills, food, child care, etc. Avoid splashing out on eating out frequently, expensive clothes or gifts & extravagant vacations till your priorities are met.
Clearing your debt payments like credit card bills or loan EMIs on time is all the more important to avoid any financial mishaps.
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2. Review your emergency fund.
An emergency fund is a must-have as it helps you meet the financial implications of an emergency. A recession can take away your job or minimise profits if you are self-employed. An emergency fund, thus, becomes all the more critical during this period.
Experts suggest to save up to one year's worth of expenses for an emergency fund during an economic crisis
Review your emergency fund and ensure it is at least 6 to 12 months’ worth of your expenses. If the fund is insufficient, add money to it to become optimal.
Remember that this fund is only for a rainy day or unforeseen emergencies like losing employment. Treat this fund sacredly and never ever touch this money unless absolutely necessary.
If you don’t have an emergency fund, it’s high time to create one. You can invest it in safe and liquid mutual funds or interest providing savings account to get good returns.
3. Have a long-term perspective
A recession is not a long-term affair. With time, the economy recovers, and so does your portfolio. Do not panic when a recession hits. Have a long-term perspective and stick to the financial plan you make. Save and invest for your financial objectives so your portfolio will not be adversely affected when the recession is lifted.
Furthermore, avoid panic redemptions. A recession makes many liquidate their investments, especially market-linked ones, when the market plummets or when they need funds. Resist the impulse to stash all your money out at the first sign of a downturn.
Remember that markets that fall will eventually get back on their feet
Invest for the long-term. If you have SIPs, continue them, and you can benefit from rupee cost averaging. Avoid redeeming your existing investments in a sluggish economy and stay the course.
Fixed-income instruments, like fixed deposits, Public Provident Fund, recurring deposits, etc., are not impacted by a falling market. Even in a recession, they give interest income on your investments.
If you are risk averse and want to avoid market volatility or if you don’t want to invest in a falling market, you can choose fixed-income securities. Then there are also safe-haven investments, like gold sovereign bonds, treasury bonds, ETFs, utility stocks, etc. They hold their value or even give returns in economic instability like a recession.
4. Diversify your portfolio
Lastly, portfolio diversification is the key to surviving a recession without suffering considerable financial damage. This approach means allocating your investments into different avenues which are not related to one another. This way your investments will be hedged and protected against sector or market risks.
Diversification allows you to enjoy the advantages of various investment avenues while minimising risks.
For instance, having a healthy diversified asset mix of equity, debt, gold, money markets among others in your portfolio would help you maximise returns while minimising risks.
Assess your risk profile and invest in different securities for attractive returns at reduced risks. With MoneyPlanned, you can invest in expert-recommended globally diversified portfolios which help you beat inflation and market volatility.
The Bottom Line
You might not have control over a recession, but you control your finances. Manage your finances wisely during a downturn to stay ahead.
It's important to remember that markets that fall will eventually get back on their feet. Keep investing even during a recession with a risk-adjusted diversified asset allocation.
Focus on your financial goals and not on the market fluctuations
MoneyPlanned can make this process seamless for you. You can build a globally diversified portfolio made to measure for your financial goals. What's more? Our expert-recommended portfolios helps you beat inflation and market volatility during all times.
Download the MoneyPlanned app and plan your goals regardless of the market conditions.