Five ways to make the most of your cash in a recession
If you've turned on the TV or picked up a newspaper lately, the words 'recession' and 'downturn' probably have you working up a cold sweat over your finances
Speaking exclusively to State Custodians, financial adviser Peter Foley shares his insights on how to manage your cash when there's a dip in the economy.
1) Add to your emergency funds
An emergency fund is the money you've saved up for a rainy day, with the sole purpose of helping you get through financial hardships. When the economy starts to dip, our jobs and our income can be put in jeopardy, which is when a safety net of emergency funds comes in handy.
According to Peter, those who have emergency money are much less likely to fall into debt.
"For those who have emergency savings, this downturn is the rainy day that came. And for those that don't, it's good to make a plan for the future and start saving now so you're better prepared to weather future storms. In terms of regaining or starting your backup funds, have a plan for what to do with your money when you get paid and stick to it.
"A portion should go to fixed expenditure, discretionary spend and the rest to savings. With discipline, you'll be sure you replenish your savings in no time," says Peter.
2) Pay down debt
When it comes to debt, there's 'good debt' and 'bad debt'. Good debt is considered tax deductible whereas bad debt is non-deductible.
Bad debt is commonly associated with personal debt, for example overdue credit card bills, unpaid fines, or a car loan.
"In a downturn, you typically see low interest rates, which makes it a good time to pay off your debt quicker. Have a plan for your debt repayment that balances your need for lifestyle, as well as making as many extra repayments as possible," says Peter.
To figure out if you can afford to top up your debt repayments, add up all your current monthly expenses, including debts, and subtract that number from your monthly income. If you still have money left over, consider adding a percentage of that to your regular debt repayments.
If you have a home loan, thinking about taking advantage of lower interest rates by packaging all of your existing 'bad' debts (e.g. credit cards, car and personal loans) into your mortgage, so that all your debts are gradually paid off through your regular mortgage repayment, which is likely to have a lower interest rate.
3) Keep investing
In a recession, some asset classes are hit harder than others, so it's important to reassess your investment portfolio, cut any dead weight and reinvest where there's opportunity to grow.
However, it's important to know whether you're holding assets that are having temporary negative returns, or whether there's a broader and more permanent issue. If you're unsure about your investment performance, it's important to seek advice.
If you're a share investor thinking of exploring new avenues, 'safe industries' or blue-chip stocks are a good option for those looking for a 'slow and steady' approach. With this strategy, it's important to adopt a long-term mindset – your investments may increase or decrease overnight, so try to stay away from focusing on the day-to-day price movements.
"When considering companies for investment, consider those that have strong underlying fundamentals such as good leadership and a healthy balance sheet. When thinking about sectors, consider those with factors that will support good returns, such as demographic trends that will support the business model of companies in that sector and insulate your investment against downturns. For example, healthcare," explains Peter.
4) Invest in yourself
COVID-19 has accelerated new ways of working, and as a result, caused a shift of in-demand skills currently needed in the workforce. With these rapid changes occurring, it's an ideal time to diversify or up your skillset and increase your employability.
Digital skills in particular are increasingly in demand. There are plenty of short to long-term training courses on offer, including Microsoft Learn and General Assembly, which are available to attend online outside of regular work hours.
Another way to invest in yourself is to increase your retirement savings. Most employers are able to set up a salary sacrifice arrangement with your super fund. This involves taking a slice of your pre-tax pay packet and diverting it to your super account. There are also tax benefits to salary sacrificing into your super fund.
5) Invest in property
With mortgage rates low and affordability looking better than during the GFC, buying a property could help you get ahead financially.
While buying an investment property can deliver financial benefits through capital growth and rental income, property investors need to consider how their purchase fits into their immediate financial and life goals, too.
"Choosing how much to invest versus save is a personal choice. It comes down to understanding what your goals are and having a strategy to meet and complement them," Peter concludes.
The opinions expressed in this article are the opinions of the author(s) and not necessarily those of State Custodians. The above is general commentary only and is not advice tailored to any individual's financial situation. We recommend seeking advice from an insurance or finance professional before implementing changes relating to your finances.