Asked on 13 Mar 2020
Given all the uncertainty and COVID-19 situation, it would be good to prepare for a possible recession, but how can I be prepared?
I guess this is where 'preaparing for a rainy day' really comes into effect.
It is very true that many companies are starting to cull jobs and freeze hiring, along with other signs that consumer spending is down, overall economy does not look like it's in great shape.
While I personally don't have any experience with a recession, I did much research on this to see how people have dealt with it in the past. I have adapted it for a Singapore local version so hopefully this is helpful.
TL;DR: Here are 7 guiding principles:
Pay down debt.
Boost emergency savings.
Identify ways to cut back.
Live within your means.
Focus on the long haul.
Identify your risk tolerance.
Continue your education and build up skills.
1) PAY DOWN DEBT
It’s crucial that you pay down any outstanding debt — more specifically, high-cost debt, such as your credit card balance — to create some breathing room in your budget.
Often, economic downturns lead to job loss. If you’re worried about job security, paying off your obligations might bring you more peace of mind.
Prioritize credit card debt and student debt, then turn to other types of loans, such as mortgages or car loans.
2) BOOST EMERGENCY (RAINY DAY FUNDS)
In the event that you get retrenched, you have enough (ie 6 months of your monthly commited expenses - eg Food, Telco, Electricity and more)
Basically this is where it really comes into play because you don't need to worry for at least 6 months when you are out hunting for a new job to replace your primary source of income.
Storing it in a higher yield savings accounts makes alot of sense in this current climate, you can use this tool we built here.
3) IDENTIFY WAYS TO CUT BACK (keep your cash burn low)
Before a downturn begins, it’s a good idea to go through your monthly expenses. Identify which items are discretionary — services or items you don’t need — and which items are a necessity.
The discretionary items (for example, lavish gym memberships and luxury holidays) and are most likely ones that you can either eliminate now or in the future.
4) LIVE WITHIN YOUR MEANS
It is actually linked to the above point 3.
Bascically to make your cashburn low, prepare to cut back and dinners out or nights out at the bar with friends can seriously add up over time.
5) FOCUS ON THE LONG HAUL
After addressing your emergency savings and paying off your debt, your next worry when thinking about a downturn might be about your investments.
The thought of the markets plummeting might make you fearful that you’ve lost all of your earnings after years of hard work.
However, if you are a long term investor, this could be a unique opportunity for you to start thinking about how you can get undervalued opportunities at a good price, or simply just invest in the market index because it's on the low during a recession. (so you won't have a concentration risk on just one or two companies)
6. IDENTIFY YOUR RISK TOLERANCE
Understand how much risk you are willing to take. Because this will change how you think of your investment horizon.
Speak to your financial advisor or take a risk assessment test with any of the robo advisors in the market (there are alot out there right now) and when you say you can stomach volatility, it has finally hit and many of us are shaking now.
7. CONTINUE TO BUILD UP SKILLS
This one really goes without saying and it has been re-emphasised by the SG government with the skillsfuture, news, and more. Up-skill and re-skilling, things which are big trends as always.
But to recession-proof your life, one of the best investments you can make is pursuing an education.
During recessions, the unemployment rate for those with a bachelor’s degree or higher is much lower than for those who don't have any qualifications.
Making sure that you can become recession proof is something to think about in the long run!
Mildly-adapted from a US version here: View Full article (http:// https://www.bankrate.com/personal-finance/smart-money/ways-to-recession-proof-your-finances/)
Being of value to your boss. If you're self-employed, being of value to your clients and customers.
On the practical side of things tho, yes, following Kenneth's lists is a really good idea. If a recession really do goes down, interest rates would tend to be lower, thus refinancing would be a good idea. Keeping cash is incredibly important.
One thing I would also like to add is relationships. During the recession, it'll be a blood bathe, people would be out of jobs, market would be crashing. But end of the day, what's most important is that we don't lose humanity. We don't lose hope. It's the most trying time where we see ones true colours. Priorisites relationship above everything else.
05 Apr 2020
invest in yourself (education)
support Your family/friends, donate (if for a good cause, that money is never lost)
think ultra-longterm as to investments, no change needed to the following thoughts:
Firstly, we should do an evaluation on our cashflow. Through this process, we will understand our earning ability and spending habit.
Here is a Guide:
Next, ensure that you have sufficient liquidity in case of any employment or market changes. (More details in Part 4.1).
Secondly, it is important to have a complete understanding of your existing insurance portfolio. Through this process, it allows us to understand the coverage that we have, any financial gap, as well as to find out whether we are overpaying for our insurance policies.
Key Reasons Why:
At this point, we will have a clearer comprehension on our insurance coverage, especially for COVID-19.
If you intend to invest your money, then ensure that you have sufficient liquidity first. Moreover, invest only money that you can afford to lose. Give the current climate now, nobody knows how low the market will fall, or when it will recover.
Therefore, invest with extreme caution.
On the whole, comprehensive cashflow planning and a good grasp on your insurance portfolio helps you to build the base for the impending recession. While inevitable, stay positive and focus on how to improve yourself daily. All will be well!
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