A recession affects companies’ sales and stalls or prevents economic growth.
There may be widespread unemployment as organisations lay off large portions of their staff because of rising costs. Additionally, retirement and other savings accounts can suffer if investments like stocks and real estate lose money.
Increasing financial uncertainty may also result in lenders raising their lending requirements, which makes it harder for people to get new credit.
While economic recession is unavoidable, it is possible to weather the storm if you anticipate the challenges early and prepare for them.
Here are key steps that will help you prepare for uncertain times:
Analyse the financial priorities you have
In a recession, it’s difficult to predict what will happen next and when things will improve. Therefore, it is crucial that you are clear about your financial situation, said Abhinav Angirish, Founder at Investonline.in while talking to CNBC-TV18.com.
Establish a budget and keep track of expenses
According to Archit Gupta, Founder and CEO at Clear, individuals should start preparing a budget and listing expenses.
“Determine how much you can put aside as savings based on the monthly expenses and income. Review your budget and set financial goals,” he advised.
Increase your savings
Start spending wisely during a recession. Try reducing expenses on non-essential spending, like restaurants, entertainment and clothing.
When you make conscious spending choices, you can increase your savings.
Make sure you have an emergency fund
You should keep a reserve of cash for unexpected expenses, like car repairs or medical issues, as these costs continue to rise. Build your cash reserves by direct depositing 10 percent of each pay check into high-yield liquid funds, Angirish told CNBC-TV18.com.
According to financial advisors, you should have an emergency fund that covers three to six months of living expenses.
A recession, however, will require you to have more cash on hand – finding a new job could take up to a year if you lose your current one.
Be patient with your investments and think long-term
It’s essential to remember that investing is a long game, where you benefit most from sticking it out over the bumps. Market movements can be exciting, but they can also be unsettling.
“A market downturn may be a good opportunity to purchase stocks for a bargain price. Use SIP to take advantage of rupee-cost averaging. This entails investing small amounts regularly rather than investing one lump sum at a time. Investing in this way reduces the volatility that affects an investment.” Angirish said.
Diversify your investments
Diversifying your investment portfolio mitigates risk and combats market volatility. Invest in several asset classes such as bonds, stocks, gold, real estate, etc, said Gupta.
Bonds have often been a good source of income, while equity mutual fund can increase your portfolio’s growth. You can also reduce your vulnerability to economic downturns by diversifying into international funds.