5 ways to recession-proof your finances

Economic downturns and rising living costs are out of our control but there are steps you can take to safeguard your finances.

Rate hikes, high inflation, falling house prices and slower economic growth have resulted in some speculation that a recession could hit Australia. Technically, a recession is when there have been two consecutive quarters of negative growth in real GDP.  But how likely is it that will happen?

Well, when Canstar posed the question to independent economist Saul Eslake in early August, he said that the “probability of a recession, thus defined, is less than 50%. But it’s not zero either. I’d put it at about 20% to 25%”. Many experts share a similar view – although they can’t rule out a recession they don’t think it’s likely.

But even if Australia doesn’t plunge into a recession, the rising cost of living has put pressure on many household budgets. There’s not a lot you can do to prevent a recession or stop costs from rising but here’s what you can do to safeguard your finances.

1. Review your expenses

One of the first things to do is to take a cold hard look at where your money is going and identify areas where you might be able to make some savings. Print out your bank and credit card statements and go through every expense one by one. Are there any expenses that you can cut out completely? Are there any areas where you may be able to save money? One of the simplest ways to find savings is to make sure you have the best deals on all your everyday bills. If you find a better price, then ask your existing provider to match it and if they aren’t willing to come to the party, then be prepared to switch.

If you’re really serious about saving money, my tip is to create a bare-bones budget. A bare-bones budget only includes the expenses you need to survive – such as mortgage/rent, groceries and utilities – and not the things that would fall under nice-to-have or luxuries. Try living on your bare-bones budget for a few months until you have built up a cash cushion (see the next step).

2. Set up a cash cushion

It’s really important to have a cash cushion, often referred to as an emergency fund. This is a decent chunk of money that you have on hand if any unexpected expenses pop up. While many experts suggest you stash away enough to cover at least three months of expenses, that may not be realistic for you but that doesn’t mean you should ditch the idea of an emergency fund. Even $1,000 or $2,000 can be a good target to start with. Consider taking on a side hustle or selling unwanted items to make extra money to put towards your cash cushion.

3. Pay down your ‘bad’ debt

If you have any ‘bad’ debt such as money owing on your credit card, then it’s vital to knuckle down and clear that as quickly as you can. You may consider taking up a balance transfer offer which gives you a special rate – often 0% – for a limited period if you transfer your debt from a different institution.

It’s important to play by the rules because if you don’t pay off the debt by the specified time the ‘revert’ rate can be quite high. Be sure to find out what the revert rate is and also ask if there is a balance transfer fee. If you paid a 2% balance transfer fee on a $5,000 balance, that adds up to $100.

If you have multiple debts, you should focus on paying them off one at a time. Either rank your debts in order of interest rate from highest to lowest (avalanche method) or by balance from smallest to largest (snowball method). You focus on the debt at the top of the list first and pay off as much of it as you can. You continue making the minimum repayments on any debts lower on the list. Once you have paid off the first debt you divert the extra money to the next one on the list, and so on.

→ Related: How to become debt free: 8 tips to boost your finances

4. Look for ways to protect your earnings

If you don’t think you are being paid what you’re worth or are worried that your job may be at risk then it may be time to dust off your resume and start exploring new opportunities. You may also want to consider looking for a ‘recession-proof’ job. Industries such as health care, education and infrastructure are likely to do well even in tough times.

You may be able to score a pay rise by getting a new role. New data from employment platform Seek showed that advertised salaries have increased by 4.1% over the months until July. Some of the industries that have experienced the biggest salary growth include design & architecture, ICT, trades & services and admin & office support. So, give your resume a refresh, update your LinkedIn profile and start networking.

You may also want to look for ways to supplement your regular employment income. Maybe you can drive an Uber or take on a few Airtasker jobs. There are also a number of ways you may be able to make extra money without leaving the house.

→ Related: Top 10 highest paying jobs in Australia

5. Don’t make impulsive decisions about your investments

The thought of tough times and the possibility of the sharemarket taking a tumble might be a scary prospect but it’s important not to panic. Even if you don’t own shares directly, most of us are exposed to sharemarket volatility through our superannuation.

When the market took a dive thanks to COVID-19 many Aussies moved their money into cash and the same thing happened during the GFC. The problem with that is that you are actually ‘crystallising’ any losses and may miss out on better returns when the sharemarket begins to bounce back. If you are considering shuffling your investments around, then it’s probably a good idea to get independent expert advice before making any moves.

In fact, if the market falls it could potentially present a good buying opportunity. The key is to think long term, diversify and get professional advice.

→ Related: Why you might consider investing in a recession

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