How to survive a looming recession

In stark contrast to a booming economy, a recession can be devastating on both a global and individual scale. While you can’t control when a recession will hit – or how long it will last – you can take steps today to secure your finances and reduce the potential impact.

However, please remember that the ideas and information below don’t take your personal circumstances into account, and seeking advice before making any decisions is important. This is not a guide – this is just a starting point to get you thinking about what could be beneficial for you.

What is a recession?

A recession is defined as being two consecutive quarters of negative economic growth, and the most famous instance in recent history was the Global Financial Crisis of 2007–08. While Australia did not experience a large economic downturn or a financial crisis during that period, the knock-on effects across industries meant we witnessed the devastating impact on countless nations and their citizens.

While we have been lucky to experience decades of economic growth, many experts are predicting that Australia will face a recession in the not-too-distant future. In fact, former Treasury economist Warren Hogan says there’s a fifty-fifty chance of it happening in 2023.

How a recession might impact you

Even mention of the word ‘recession’ conjures frightening images and tales of woe across the media, and while it does indeed result in significant economic challenges, thankfully for most Australians it won’t mean significant poverty or homelessness.

That being said, most recessions involve stagnated wages (meaning no pay rises until the economy recovers), major volatility in the share market (which might impact your investments and superannuation), and increased unemployment as businesses stop spending money. If you are made redundant during this period, it could put you in a difficult position financially and it may be hard to find new employment until the economy improves.

3 ways to potentially secure your finances

The good news is that with forward planning and an understanding of how a recession may impact you, you can start taking steps to secure your finances which will help to protect yourself and your family’s wellbeing during this period. While it’s unlikely you will be able to make yourself or your job completely recession-proof, we spoke to Whitley Bejah, Associate Lecturer at Griffith University, about ways to minimise the impact.

1. Improve your financial literacy

Firstly, you need to understand exactly how much money is coming in and going out each pay cycle.

“It is really important that you understand what your committed expenses are,” Bejah says. “For example, your mortgage and utilities, but also your discretionary expenses like groceries, petrol and gym memberships. Then there are your ‘choice expenses’, such as eating out, streaming services and alcohol.”

Categorising your incomings and outgoings will help put a clearer frame around your current financial position. From there, you can see any red flags (i.e. unnecessary expenses that can be reduced). But being financially literate can also mean knowing the difference between wanting something and needing something.

“Once you understand the underlying reasons why you want something – whether it’s about status, ego, or simply keeping up with the Joneses – then you can question if you really need it.” Bejah suggests spending some of your spare time reading personal finance books or listening to podcasts, the examples below can offer new insights to help expand your financial literacy:

• My Millennial Money (podcast)
• She's on the Money (podcast)

2. Minimise your debts

Once you have categorised the money that is coming in and going out every pay cycle, you may find that you have some extra funds you could put into savings or pay down any debts that have accrued.

3. Build up your emergency savings

If you don’t have any debts to pay off, the final step to preparing for a recession can be to build up a strong emergency savings buffer. This is particularly timely for Australian households as the average saving ratio has decreased from 19.8% for the June to September 2021 Quarter to 8.7% for the March to June 2022 Quarter, this year.

Even a small amount each week can become incredibly helpful during a recession. Just $20 weekly, for example, results in over $1,000 saved over the course of a year.

Hard-and-fast tips for financial wellbeing

While these strategies can become a part of your long-term financial plans, there are small changes you could make today that could result in big savings over time – and may help to protect you in case of a recession:

• Set good savings habits: “Labelling your savings accounts with specific goals, such as ‘Wedding’ or ‘Holiday’, or purposes, such as ‘Emergency fund’ or ‘Home expenses’, is an effective way to change your spending behaviour,” Bejah says. “By assigning emotional attachment to the goal or purpose, it helps you stay committed and accountable to yourself.” She also suggests setting up automatic direct debits into these accounts on the same day you are paid, as this can reduce the temptation to spend the money on other things.
• Broaden your investments: Look into how you can diversify your investments in order to grow your wealth. Everyone has different aspirations, so make sure any new investments align with your risk tolerance.
• Get expert support: “Speak to a money coach or financial advisor,” Bejah says. “They have a lot of knowledge and love to educate people on how to make better financial decisions. The same goes for mentors. Speak to someone who has been successful financially so you can learn from their successes and failures.”

Putting yourself in the best position

You may not be able to stop an impending recession, but adopting certain strategies could help minimise the impact on you and your family.

While you are growing your knowledge of financial concepts and strategies, don’t forget about protecting the lifestyle you’ve worked so hard to build. With Choosi, you can compare a range of life insurance policies online.