Snapshot: 6 ways to manage money in a recession
- Revise your budget
- Focus on your debt
- Build up your emergency savings
- Reduce your housing costs
- Start investing, or improve your strategy
- Sort out your superannuation
A recession is a sustained period of reduced economic output and higher unemployment. As of August 2023, 62% of us believe Australia will enter a recession in the next 12 months according to Finder data.
This guide will take you through 6 ways to prepare and manage your finances for an economic downturn.
The economic situation changing around you is a good prompt to revise your budget. Is your income the same, and are there any opportunities for you to increase it? Can you cut back on any expenses or spending? And is your allowance for expenses like groceries still the same considering increased inflation?
Go through your budget line by line and see what needs to change. If you don't have a budget or aren't sure where to start to revise yours, take a look at our full guide to budgeting.
Paying down debt is vital during a recession. There's a higher chance of being made redundant or having your hours cut, which could make it really difficult to meet your repayments.
Look at your unsecured debts (credit cards and personal loans) and find out which debts are costing you the most. It may be those with the highest interest rate or those with the highest amount left to repay.
You can use these numbers to choose a debt repayment strategy.
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 more quickly.
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. Some of these loans let you consolidate credit card debts with loan debts, too.
Thinking about your savings when expenses are sky-high can be tricky, but it's really important to have cash savings on hand during a recession. It's especially important if you work casually or are expecting your expenses to increase soon, for example, you're due to have a baby or moving house.
As a general rule, it's a good idea to build up an emergency savings fund of 3-6 months' worth of living expenses.
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Once you start building up your emergency savings, you can consider an account to put them in to earn interest and make your money go further:
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.
A large proportion of our expenses are spent on housing in Australia. Finder data reveals that 42% of Australians said housing costs were a source of stress in March 2023 compared to 34% in March 2022.
Renters have a trickier time of reducing their housing costs because moving doesn't always guarantee cheaper rent, and then there are moving costs to consider.
However, there are still savings to be had. Look into your energy provider and compare your options to see if there are any cheaper options available. You can also compare other utility providers such as your internet.
Then there are the more lucrative but life-impacting options, such as renting out one of your spare rooms. If you own your car you can also consider renting that out on days you aren't using it, and if you have a parking spot you aren't using, you can consider renting that out as well.
Refinancing to a lower interest rate on your mortgage can save you money without too much effort on your part. While rates are quite high right now (the average fixed interest rate is 6.55% p.a. as of November 2023) you still may get a better deal than you're currently on or get a home loan with features that better suit you.
One example is offset accounts. 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.
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.
There are 2 questions you're likely to ask yourself during a recession: should you sell, and should you invest more to bolster your portfolio?
Here's how to navigate your investment decisions.
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:
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 fund is 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.
The first thing to check is whether you have multiple super funds. If you do, you'll be paying multiple sets of fees which will eat a big hole into your retirement savings, so 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.
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.
Important: The standard brokerage fee displayed is the trade cost for new customers to purchase $1,000 of either Australian or US shares. Where a platform charges different fees for both US and Australian shares we show the lower of the two. Where both CHESS sponsored and custodian shares are offered, we display the cheapest option.
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