While we like to talk about “the economy” as if it’s a static entity, it’s more like a living, changing ecosystem like a body of water. It fluctuates unpredictably, sometimes wildly, and can look very different from one year to the next.
South Africa is currently in its second recession in two years and I have put together a guide to help you go through this recession and any future ones.
Let's begin by addressing the elephant in the room, What is a recession?
A recession is often defined as two consecutive quarters in which an economy shrinks. This can be seen by looking at real income, employment and production within the boards of South Africa.
Recessions are extremely disruptive to people's lives and have financial implications such as job loses, rising prices and shortages.
How to prepare for a recession
Being prepared for a recession means being ready to care for yourself and your family financially if your current situation is forced to change. Here are some specific recommendations:
Build your emergency fund
The number one thing you can do to prepare yourself for the next recession is to save up a substantial amount of money to serve as an emergency fund. Experts recommend keeping 3-6 months of living expenses in a high-interest savings investment account. This money should be only to be touched in the event of an emergency like losing your job. You have a look at our short term investment which can serve that purpose for you.
A recession can increase the difficulty of losing a job because not only are you out your usual income but a slow economy may make it hard for you to get hired again at a similar salary. When you do find new work, you may be forced to take a pay cut, which will result in financial pressure unless you have savings to make up the difference.
Examine your expenses
Considering that an emergency fund will only go so far to support you in the event of a job loss or pay cut, it’s good to make sure you’re living as lean a lifestyle as possible before the worst happens.
Make it a habit to sit down with your family and examine your spending to find areas where you can tighten your belt (you have the opportunity to do that now during the lock down). Some items that may be on the chopping block are eating out, expensive clothes or gifts, extra spending on hobbies, and vacations.
Pay down debt
Working to pay down debt when the economy is booming is like doing your future self a favour. You can start paying extra capital while things are good to pay your debts off faster. Getting your debt payments under control is essential, since having good credit will help you weather future financial storms.
A popular way of paying down debt is the “debt snowball” method, which involves paying off your smallest loans first to give you some early wins that can motivate you to tackle your bigger loans. Another option is the “debt avalanche” method, which has you pay down your debts with the highest interest rate first, no matter its size, and work your way down to the lowest interest loan.
Self-development and side-hustle skills
One of the major concerns people have about recessions is the potential for job loss. Retrenchments are common when the economy takes a nose-dive, and getting a new job can be tricky when no one’s hiring. One good thing to do while the economy is healthy is to pick up some in-demand skills or credentials to make yourself more attractive on the market in case you need to look for a new job in a down economy.
Another option is to pursue skills that can be done as a freelancer so you’ll be able to find smaller jobs as a stopgap if your main income source dries up. Once you’ve got those skills, you can use them as a side hustle to earn extra income that you can put away in your emergency fund or use to pay down more of your debt.
Don't stop investing
No matter what the economy is doing you should always review your investment portfolio to make sure it fits the level of risk you're comfortable with. Everyone's risk level is different so make sure not to copy someone else's investment strategy.
Once you have reviewed your portfolio don't stop investing during a recession especially if your investments are with us. Why you may ask? Because our investments are alternative and structured to withstand different conditions, for example during a recession it is highly unlikely that you will stop eating meat. Do you see what I mean? Are you ready to invest?
If you take the above advice you will be in a good position to ride out the next recession.
Leave your questions or comments below.