Understanding a recession and how to recession-proof your life

Recessions are part of any economic cycle, but there’s no doubt they freak everyone out – simply Google ‘how to prepare for a recession’ and you’ll get almost 30 million results.

Knowing this, how can you prepare for one? What might it mean for you, your family, your job and your mortgage? To answer these questions, let’s look at where the economy is right now and the proactive steps you could take to help recession-proof your finances. 

The nature of the economic recession – what does this mean for you?

Firstly, what is a recession? According to the Reserve Bank of Australia, there’s no single definition but it’s “generally agreed that a recession occurs when there is a period of reduced output and a significant increase in the unemployment rate”. Some experts say you’re in recession when there are two consecutive quarters of negative economic growth. 

What happens in a recession? In simple terms, the flow of money slows down: as consumers, we may spend less and save more, fearing financial stress ahead. And if we’re spending less, there’s a knock-on effect for businesses – they lose sales, may lay off staff and might stop investing in growth too. 

Other key factors include lenders tightening credit, making it harder for people to borrow money. 

Where are we at in the current climate? 

There’s been modest growth in the economy in the second quarter of 2023, according to the ABS – which experts have been buoyed by, because it’s a sign our economy is resilient even in the face of rising interest rates and household budgets under pressure.

The Reserve Bank of Australia (RBA) hasn’t raised interest rates for the past three months either, which could be a sign inflation is easing more than we expected. That said, hold onto your hats – some experts predict at least one more rate rise before 2023 is out.

Assessing the impact on your personal finances

Now could be the time to crack open the piggy bank and take stock – by that, we mean look at your accounts, income streams, expenses and current budget.

Get a complete picture of where you are financially – this inventory can help assess how a recession might impact you if one occurs, and identify exactly where you might be able to cut back.

Once you have the intel on your financial position, you might also find it a good time to educate yourself about what your options are, or seek professional advice.

Strategies for recession-proofing your finances

Our top strategies for recession-proofing your finances include:

• Reduce debts: That might mean consolidating debt or, you might have the means to make extra repayments on any debts to clear them. You could also consider asking your bank for an interest rate reduction.
• Look for high interest savings accounts: Rising interest rates may be bad news for mortgage holders but if you’ve got savings you could be in a good position to earn more on your money. 
• Cut costs wherever possible: Make your lunch every day, cook dinner over ordering takeaway, cancel the streaming services you never watch, and consider ringing all your utility companies to ask for a better deal. These are all small steps but they can add up to significant savings over the course of a year.
• Take stock of your home loan: If you fixed your home loan several years ago to get you through the pandemic, you may now be facing a fixed rate cliff – when higher repayments kick in. There are measures that can assist take the pressure off, so consider talking to your lender.
• Only cut back on what you really don’t need: The temptation may be there to slash and burn all your expenses – but don’t shoot yourself in the foot. Things like insurance premiums can take a chunk out of the budget but they can give you peace of mind in an uncertain world, and having the right insurances in place can be essential in some circumstances, in case you need to make a claim (and don’t have ready cash).

Building an emergency fund

Whether you call it a buffer, nest egg or emergency fund, everyone needs to have one. It can give you the means to manage those unexpected curve balls without having to rely on credit or borrow money. 

The Australian government’s Moneysmart website recommends having enough saved to cover at least 3 months of expenses. Have a rule that you can’t touch this money – it’s just for emergencies, like job loss amid looming mortgage repayments, or your car conking out.

Consider diversifying your income sources

In a recent survey, a whopping 48 per cent of Australians said they were keen on starting a side hustle. And when faced with the rising cost of living, it’s a smart move – especially if you can monetise a skill or hobby without too much financial outlay.

Other ways of bringing other cash in the door could include:

• Decluttering and selling items you no longer need on online platforms such as FB marketplace or Gumtree.
• Renting out your spare room or granny flat 
• Dipping a toe into the gig economy such as by becoming a ride share driver.

Navigating career challenges in a recession

One of the biggest issues we may face in a recession is unexpected job loss. If you do happen to lose your job during a recession, you might find it tricky to secure another one, especially if you’re at a certain level in your career. That’s why experts encourage people to hone their existing skills and learn new ones that could help future-proof their career.

It’s also a good time to check any business and employment-focused social media platform profiles such as LinkedIn that you may have, to ensure you’ve optimised your profile for the right keywords, so you can be found in job searches by companies and recruiters – just in case you do face being back on the job market. 

How to future-proof your finances going forward

The first thing you could do is to get into the habit of using strong economic times to build a buffer – reduce spending, squirrel away your spare cash and eliminate debts. And build your emergency fund so when the economy does hit a rough patch, you have cash at your disposal to get you over the hump.

Similarly, you might like to seek advice from a financial planner, who can do an audit of your current situation and help you figure out ways to future-proof your finances.

Protection for your family

Having the right insurances in place might also help safeguard your family’s financial future if the worst was to happen to you. Talk to Guardian Insurance about life insurance options today or request a quote online to get started.