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What would a recession mean for your household?

Samir Harith is the owner of The Comic Accountant, which helps small business owners understand accounting and finance through comic books.

OPINION: Much has been said about the prospect of a recession.

A survey this week showed that most economists expect there to be one within the next two years. But what would that mean for your home?

A recession means a tighter labor market

This is quite a difficult claim to make, as unemployment in Aotearoa is currently at an all-time low. Wages are rising as workers demand higher wages to meet the rising cost of living. So far, so good.

However, the pressure of salary demand on employers is likely to force them to rethink the contribution of each role. Hiring can freeze once a recession hits and businesses will grapple with lost demand on the consumer side of the profit equation. If demand drops enough, existing roles can be rendered superfluous.

So what should an individual worker do in the face of all this?

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Be proactive. Schedule a meeting with your manager/boss to discuss your job security concerns. This can be difficult to achieve, depending on your work culture. But you’ll never know until you try. Ask them what they think the company’s future prospects are and what they plan to do with the prospect of a recession. Warned is warned!

Think about your position/role in the company. Always think in terms of:

  1. What is the value of my contribution to the company?

  2. If I left, how much would it cost the company?

  3. Do I have a good working relationship with my colleagues/superiors?

  4. Have I performed at my level of satisfaction in the company?

What will a recession mean for your household?

123RF

What will a recession mean for your household?

This gives you a better idea of ​​whether or not your future income security is guaranteed. If you have had this conversation with your manager/boss, this self-assessment may be easier to do.

Take a stress test on your family/personal finances

Running a household is like running a business. Money comes from your work, money goes out to maintain your standard of living. What you need to test is if your household can survive a drop in income. As always, I like to ask readers to consider the “big five” expenses (the largest portion of expenses that most households spend):

  1. Your monthly rent/mortgage payments

  2. Races

  3. Eat outside

  4. Fuel expenses

  5. Electricity and utility bills

Figure out what your average monthly expenses look like for the five above and you’ll have a good idea of ​​what you need to spend to maintain a decent lifestyle for your household.

Note that you may have other monthly recurring expenses, such as insurance or a car loan that you need for the service. You will also want to add them to the calculation. Avoid indulging in luxuries like new clothes, shoes, board games or digital gadgets – these shouldn’t count towards your monthly expenses.

Figure out what your average monthly expenses look like for the five above and you'll have a good idea of ​​what you need to spend to maintain a decent lifestyle for your household.

Kirk Hargreaves / Stuff

Figure out what your average monthly expenses look like for the five above and you’ll have a good idea of ​​what you need to spend to maintain a decent lifestyle for your household.

You want to examine how much surplus you have. The surplus is your income minus your expenses. This surplus also shows you how much your income can drop before you need to make serious adjustments to your monthly expenses.

For instance:

The Chan-Ramanathan household spends about $8,000 on their five major monthly expenses. Both parents have a combined income of $12,000 per month. They have three dependent children aged 8 to 14. They have a monthly surplus of $4,000.

This means that the Chan-Ramanathan family may experience a drop in monthly income of up to $4,000 before having to adjust their expenses.

Test your previous assumptions. If you lost your job, would you be able to afford the five big expenses? What if both employees lost their jobs? Sit down with your partner (if you have one) and think about what can be done to reduce your expenses. Here are some ideas to consider:

  1. Review the insurance you pay for and determine if you need it or if you need to find cheaper providers

  2. Switch to a cheaper electricity supplier

  3. Reduce fuel consumption (which is easy to do if you’re unemployed)

  4. Cook more at home instead of eating out/buying takeout

The idea is to have a plan in place in case the worst happens.

Many financial writers will have some variation in how much you need to put into your emergency fund. If you have one, great! If you don’t have one, it can be quite daunting to save up to three or even six months of your monthly expenses. Ouch! If you’re just starting out, I recommend aiming for at least one month of average household spending saved.

This amount will give you at least a month to look for a new job and plan to reduce your expenses. It’s time to start building that emergency fund. Sell ​​stuff you don’t need/use and make an active effort to spend part of your salary on it. You have this!

Be on the lookout for the next thing

A recession is scary, but it doesn’t tend to last too long (assuming the government is handling the situation well). Being proactive is essential. Assess the labor market before losing your job. Discover the other opportunities available to you. It might even be a good time for you to think about pursuing that side hustle you’ve always enjoyed doing.

Turn crisis into opportunity. Learn from it and become stronger through it.

And as always, stay positive.

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