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How to protect your finances against the recession

If you’re worried about managing your money as the cost of living soars, the prospect of a possible recession might seem particularly distasteful.

The technical definition of a recession is two quarters of the decline in gross domestic product.

But often what really matters is how it feels at home. Recent dismal surveys of business and consumer confidence indicate that, for many of us, the downturn may have already arrived.

There are some things you can do to help “recession-proof your personal finances.”

don’t panic

Slowdowns are part of life and they pass. Liz Koh, director of Enrich Retirement and a former financial adviser, said mindset was a big factor in weathering a recession.

“You have to have a resilient mindset. It is extremely important. Without a resilient mindset, you may not be able to withstand events that negatively impact you.

Check now that you are in the right type of KiwiSaver fund

Markets have already been volatile this year, but it is possible that a recession could lead to further declines.

It’s a good idea to check in advance if you’re into the right type of KiwiSaver fund (or other investment) for your situation.

If you have some time to go before you need the money, you’ll probably want to invest in growth assets, which can fluctuate significantly in value.

If you need money fast, taking less risk reduces the chance that your balance will be down when you withdraw.

However, it is best to make these types of adjustments when markets are flat, because if you reduce risk when markets go down, you tend to lock in your losses.

“It’s a bit tricky because you had to make the right choice on your investment schedule when you invested the money,” said financial coach Shula Newland.

“And it’s kind of hard to go back in time and do that again. If people aren’t sure, the best thing to do is talk to an investment advisor or planner about your specific situation. »

Keep contributing to your KiwiSaver fund – although it may seem a bit more difficult if your income drops, it puts you in a good position to benefit from the recovery when it does.

Houses cost much less, but in previous decades mortgage interest rates were much higher. Mortgage rates are on the rise, however, as the Reserve Bank Te Pūtea Matua raised the official exchange rate to fight inflation.

Pay off the debt

A downturn is much easier to manage when you don’t have to worry about a large amount of debt. Focus on eliminating this, especially high-interest consumer debt, be careful with your buy now, pay later, and continue to make more than the minimum payment on your home loan if you have one.

“It’s important to get rid of any short-term debt and be able to live on your income, even if it drops,” Koh said.

She recommends not to borrow the maximum that is offered to you.

“Borrowing involves the risk of increasing interest rates over time. Build a safety net around your mortgage payments by giving yourself “wiggle room”. Instead of borrowing up to the maximum you can afford at current interest rates, borrow what you can afford if interest rates rise by a percent or two.

Newland said people should be careful not to take on new debt. She said it might be possible to sell assets to help pay down debt.

Check your bills

It’s a good idea to check all your regular bills at least once a year to make sure you’re getting the best deal possible.

Check things like your electric bill against what other providers are offering and make sure you’re still getting a good price for your broadband and mobile.

Sometimes switching providers can get you benefits like account credit or special rates. It can also be a good idea to regularly check the subscriptions you pay for and determine if you still need them.

Buy now, pay later (BNPL) loans have become a habit, according to a government survey. Many people are caught in a consumption cycle fueled by BNPL. He has another dark side. Some people buy basic necessities like meat and medicine on BNPL.

Make yourself more employable

One of the main factors that helps people get through a recession is a steady stream of income. Take a mental review of your work – is it stable? If there are training opportunities you could pursue to make you more valuable to your current employer or more likely to take on another role elsewhere if needed, that might be a good idea.

Consider a secondary hustle if you have a skill or hobby that could provide a secondary or backup source of income. If you have kids, Newland said it might be a good idea to encourage them to get jobs so they don’t need pocket money.

If you are self-employed, you could speak with your accountant or a business coach to discuss what you would do if you experienced a drop in demand for your services. Having a plan might make it less scary.

“Look to diversify your revenue streams and locations so you’re not exposed to customer default,” Newland said.

“Make sure your business terms and credit policies are up to date, to ensure you get paid promptly to reduce non-payment from a customer who folds.”

Financial adviser Nadine Higgins of Enable Me said protecting income was a crucial part of weathering the recession.

“I think there’s a saying that goes something like ‘it’s a recession when your neighbor loses his job and a depression if you do’.

“If you can’t control your job prospects, you need to protect your financial side and make sure you have the leeway to help you if the worst should happen.

“There are also opportunities in recessions – so maybe your ‘recession resilience’ plan is to position yourself to be able to capitalize on those when they emerge.”

Have an emergency fund

This is the advice that never goes away. It’s a good idea to have some money saved in the bank that you can draw on to cover your expenses for a short time if needed. This can be used if you face an unexpected expense like a car problem, or if you have a period with less income.

Koh said it’s important to have cash on hand in cash, rather than having all your savings tied up in stocks or other investments.

“You must have good cash reserves or liquid investments that can be turned into cash without loss.”

Newland said people who can’t build an emergency fund should have a line of credit, such as an overdraft or revolving mortgage, available in advance as a backup.

“You have to apply in advance because if you lose your income, you won’t be able to apply at that time.”

You will need discipline not to use this money until you really need it.

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