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Now that we're officially in recession it's more important than ever to get your debts under control, examine your spending in detail and make sure you're getting good deals on your financial products.
Having a plan in place to pay off your debt is always important, but it's especially vital during a recession. There's a higher chance of being made redundant or having your hours cut back at that time, which could make it really difficult to meet your repayments.
When starting to pay down your debt, you should prioritise some debts over others.
If you have credit card debt or a personal loan, it's a good idea to focus on paying these off first. These products typically charge a higher interest rate than other credit products. While you might have this debt under control now, these could become difficult to pay down if you were to suddenly lose your income.
A balance transfer credit card allows you to transfer your debt over to a new card with a low or even 0% interest rate for a set period of time. Using a balance transfer credit card could save you money on interest and also help repay your debt quicker.
If you have several personal loans, you could consider combining these into one with a debt consolidation loan. This means you're not paying multiple sets of loan management fees.
This debt is less urgent, as you're not charged interest and it's simply indexed each year for inflation. This debt starts to be paid from your salary automatically once you earn above the income threshold, and it's taken from your pay before it even lands in your account (much like tax).
Because the inflation rate is so low right now, there's no urgent reason to rush into paying this off. If you've got money to spare, it's much more worthwhile to pay off any high-interest debt you have first. Once this is paid down, you should use any remaining money you have to start building up your emergency savings.
In times of economic uncertainty, it's really important to have some cash savings at hand. This is especially essential if you're a casual worker. If you're made redundant, you could face unemployment until the economy picks back up. This means no money is coming in, but you'll still need to meet your regular bills and ongoing payments.
Also, in times of economic uncertainty, we usually see big falls in the value of stocks and other assets, so cash is a much safer and less risky option.
While no one can predict how long the recession will last, as a general rule, it's a good idea to build up an emergency savings fund of three to six months' worth of living expenses. This means the amount you should aim to have saved will be different for everyone.
Here's how to start building up your emergency savings.
The first step is working out how much you need to have in your emergency savings. This means calculating three to six months' worth of living expenses, which can sound daunting. A good way to tackle it is to look back on your transaction history over the last few months and make a note of all your living expenses. (Bonus tip: if you use the Finder App, it will automatically categorise many of your major expenses.)
Common examples of living expenses include the following:
Keep in mind that living expenses means the things you buy that are essential to your day-to-day life, so things that are in the "wants" rather than "needs" category aren't included.
Examples of costs that usually aren't living expenses include the following:
Once you've worked out your average monthly living expenses, it's time to put together a budget. Let's say you've figured out you need $2,000 a month for living costs, and you want to save up an emergency fund of four months' living costs. That's $8,000 you need to have in your emergency savings. How are you going to save this?
As a starting point, you need to trim your spending. It's likely that going through your past transactions has revealed some spending patterns you didn't realise you had. Perhaps you discovered you were spending more money on eating out than you thought you were? Or maybe you were surprised by how much money you spend each month on various streaming services? Work out where you're currently overspending and start to cut this down.
If you need more inspiration, here are 50 practical ways to reduce your spending and save money.
Some bills are unavoidable. Whether it's car insurance, home insurance, utilities bills or your phone plan, certain expenses just aren't going away - but you might be able to lower them. This can play a big role in reducing your spending.
Car insurance: We collected quotes from 12 well-known car insurers and found the cost of insurance can vary by more than $400 a year. Compare car insurance regularly, and you may be able to make a major saving.
Home insurance: Shopping around for your home insurance can also lead to big savings. We sought quotes from 8 different insurers and found a difference of $1,335 a year for the same house.
Health insurance: Are really making the most of your health insurance? If not, consider reducing your level of coverage. You can compare prices and benefits online to find a policy which best suits your needs.
Life insurance: Cheap life insurance does exist. Reconsider the payout amount you really need or look into cheaper providers. We found customers could save over $100 a year just by switching.
Utilities: Whether it's your electricity, gas, broadband, or phone bill, you might be able to bring the cost of your utilities down by comparing providers online.
While you're actively trying to reduce your spending, try to find ways to bring in more money if possible. This is especially important if you've already been following a budget and don't have many opportunities to reduce your spending further.
Here are a few options to increase your income:
If you need more inspiration and ideas, here are 22 ways you can make some extra cash.
Once you start building up your emergency savings, it's important you have a safe place to put it that's earning you a bit of interest. Here are a few options:
A high interest savings account. Savings accounts pay a small amount of interest on your balance. They often offer bonus interest when you can deposit a certain amount each month as an incentive to save. One benefit of a savings account is that you can access the money instantly if needed.
A term deposit. Term deposits are a type of locked savings account. The benefit of term deposits is they pay a fixed interest rate that won't change for the life of the term. However, you can't access your money instantly if needed.
Deposits up to $250,000 in savings accounts and term deposits with Australian banks are protected by the government, so if something were to happen to the bank (which is unlikely), your deposit would be safe. This is part of the Australian Government Guarantee Scheme.
If you already have a mortgage, then it's a good idea to start thinking about paying it down faster. A mortgage is the biggest debt most people have and will end up costing the average borrower hundreds of thousands of dollars in interest over the life of the loan.
Minimising your home loan debt is a great way to recession-proof yourself, but there are a few things to think about:
Mortgage debt (along with a HECS-HELP debt) is typically less urgent than personal loan or credit card debt. You should prioritise the most expensive, high-interest debts first.
Refinancing to a lower interest rate can save you money without too much effort on your part. Check if your current rate is too high (rates have fallen well under 3% as of March 2020) and if so, apply for a new loan with a better rate. A home loan application can take hours of your time, but the potential savings make it worth considering.
Compare home loans rates and switch
If your home loan has an offset account, then you have a very flexible way of minimising your loan interest without losing money you may need later if you're affected by the recession.
An offset account functions like a bank account, but it's attached to a mortgage and the money earns no interest. Instead, the money offsets your loan principal (the amount you owe your lender). This means your interest charges are reduced. You still repay the same amount every month or fortnight, but more of the money goes toward your principal and less on interest. This means you repay the loan faster and pay less interest in the end.
And because the money is still sitting in a bank account, you can pull it out and spend it later if you need to. It's the ultimate rainy day fund: reduce your interest costs now and still have money to hand if you need it.
If your loan doesn't have an offset account, it might be worth refinancing to one that does and then putting some savings into it. It's a wise recession-proofing tactic.
Unfortunately, there's no guarantee that a declining economy automatically means declining house prices. It's certainly possible. No one truly knows what the future holds.
But if you actually look at property prices historically, Australia's last recession didn't result in a fall in property prices. It turns out that other factors, especially credit availability (how easy it is to get a loan) affect prices a lot more than negative growth in the broader economy. Or at least, that was the case then.
The sad fact is, property prices are high in Australia and wages haven't grown that much. Waiting for a recession to hit and then scooping up a property bargain is probably as unrealistic a dream as hoping to one day buy a house in Sydney.
In a recession some investments are hit harder than others. It's important to have an investment strategy that can handle a downturn so you avoid making last-minute, panic-driven decisions that could end up costing you.
Usually, stocks are among those hardest hit, so if you've got a large stock portfolio, it can be tempting to sell. But this isn't always the best idea. When preparing your investments for a recession, ask yourself these questions:
Remember, like any global economic event, there are winners and losers in a recession and not all stocks will go down. So whether you sell or not will also depend on what you currently have in your portfolio.
During a recession, we usually see heavy falls in the stock market as investors sell their shares and move their money into low-risk cash products. However, some stocks won't be hit as hard and some will even rise in value. But one thing is certain: a recession presents some good buying opportunities for those who are prepared to do so.
Some shares that could go up in a recession include the following:
Compare share trading accounts
Here are some tips to help you prepare and manage your investments before and during a recession.
Collapsing stock prices and falling interest rates are making property look pretty attractive, right? There's certainly something reassuring about investing in brick and mortar. Property might not be the highest yielding investment, but it's typically a long-term game and relatively stable. Property is less exposed to short-term economic contraction and pandemics or disasters (unless you buy in an area that's disaster-prone).
The truth is though that no investment is ever guaranteed. And if you do decide that now's the time to invest in property, make sure you consider the following:
It's not often as front of mind as our cash, personal investments and property, but your super are impacted by a recession too. Your superannuation is a big investment portfolio that's made up of a bunch of different assets, most notably shares (unless you've got a self managed super fund that's invested mostly in property). Importantly, your super could be one of the biggest assets you have by the time you retire.
To prepare for a period of economic downturn, the first thing to do is to make sure you've only got one super fund (this is actually important all the time, not just in a recession). If you've got multiple funds, you'll be paying multiple sets of fees which is unnecessary and will eat a big hole into your retirement savings. If you find you've got more than one fund, you should consolidate them. If you've just got the one super fund, it's still worthwhile comparing your fund with other options to make sure you're getting a good deal. Can you save on fees and costs by switching to another super fund?
If you're happy with your current super fund and don't need to consolidate multiple accounts, the strategy you take with your super while preparing for a recession will depend on your age, your risk tolerance and your personal circumstances.
If you're young and still a while away from retirement, generally the best thing to do with your super before or during a recession is to leave it alone. If you've got your super in a balanced or growth fund (which the majority of Australians do), your super will already be diversified across a range of assets.
This means that while shares might be falling, other assets will be doing well. So even if the share market has fallen 20%, the overall impact on your super won't be as significant. This is because the portion invested in other assets (like gold, bonds or property) will help outweigh some of this loss.
You might be tempted to move your super into a lower-risk cash option, but this can be more costly than you think. First, if you change your investments, you're realising and locking in the losses (this only happens when you sell; until then, the loss is just on paper).
Second, you risk missing out on the potential rebound when the share market picks back up, which it will (we just don't know when).
And third, a lot of people moved their super into cash investments during the global financial crisis (GFC) and simply forgot to move it back into growth options when the market started to recover. This means they missed out on a decade worth of strong share market performance following the GFC.
If you're close to or already in retirement, you'll have less time for your super to recover after a recession. However, this doesn't necessarily mean you should rush into changing your investments.
If you have your super in a balanced fund, a lot of these will automatically be adjusted in line with your age anyway. So it's likely that your super has already been gradually moving towards defensive assets and away from growth assets like shares.
You could consider moving some of your super into more conservative assets, but remember that you'll need growth assets like shares to ensure your super lasts as long as possible in retirement. Even if you're about to retire next year, most of your super will stay invested for the next 5, 10 or even 15 years.
It's a good time to check what insurance cover is included in your super and to add or remove anything you think you do or don't need.
A lot of super funds offer income protection cover as an optional insurance cover, which could be good to have during a recession if you feel like your job is vulnerable. However, if you already have an existing income protection policy outside of your super, you may be doubling up on fees by also having it within your super.
While you're tidying up your super, it's also a good opportunity to check you've got your beneficiaries added. Your beneficiaries are who you want your super to go to in the event of your death, so it's really important to keep these up to date.
Taking control of your finances is daunting at the best of times. When facing a recession, it's even scarier. We hope that the information on this page helps you save money on your financial products and helps you make some good decisions.
If you need more help, the tables below contain competitive products, ranging from mortgages to savings accounts to super funds. And if you need more guidance on saving money, managing debt or need the services of a counsellor, check out some of these links.