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Why preparing for a recession can be good for your finances

Estelle Scholtz-Mare, Head of Financial Wellness Marketing for Momentum. Estelle Scholtz-Mare, Head of Financial Wellness Marketing for Momentum.

When it was announced that economic growth contracted by 0.6% in the first quarter of 2014, the dreaded ‘R’ word became a topic of conversation. The possibility of a recession strikes fear in the heart of individuals and the industry alike. The signs are there, however, they are more like post-it-notes than billboards.

The main driver of the negative growth in South Africa is largely due to the strikes we have seen in the mining sector. While a second quarter retraction would signal a technical recession, economists and the South African Reserve Bank are optimistic that this is not going to happen.

Estelle Scholtz-Mare, Head of Financial Wellness Marketing for Momentum says that “While we can all breathe a sigh of relief, we should not sit back and adopt a ‘business as usual attitude.” Now is the perfect time to take stock and recession-proof our finances. The cornerstone of financial wellness is being prepared for financial curve balls and to have enough wiggle room in our budgets to cope with fewer resources.

Scholtz-Mare says, “If you are concerned that you may be vulnerable in a recession, there are many things you can do to limit the impact. The first place to start is to do a complete audit of your current financial situation.” She suggests that you take a SWOT-analysis approach to your finances (that is, Strengths, Weaknesses, Opportunities and Threats.) You need to identify which areas of your financial life will be most vulnerable to a downturn and take action to lessen the impact. Typically, a recession means higher inflation and interest rates, higher food and fuel costs and the threat of a job loss. By taking the time to analyse the impact and the risk of these events happening, you can take precautionary measures.

Here are some actions that you can take right away to safeguard your financial position:

Grow your emergency fund

If you can, build a cushion of at least three to six months’ salary in the bank. This will give you quick access to cash if you lose your job or are forced to take a salary reduction. It will also prevent you from having to dip into vital savings or equity in your bond.

Get familiar with frugal

Start applying a frugal mentality to your purchases. You do not have to go to extremes. However, start being more price conscious and filter every prospective purchase through the “Do I need it or do I want it?” process. You will find that many of your purchases fall into the ‘want’ category.

Play the game

If you are living off two incomes, see if you can get by on one salary and save the other one. This will give a huge boost to your emergency fund but also help focus you on cost-saving exercises.

Ditch the debt

Most of us have way too much debt. If you can pay off some accounts and invest the savings then you will be in a far better position to weather financial challenges.

Build another income stream

Turn your talent into income. Take the time to investigate if you can start a second stream of income and save it all. If this is not possible, evaluate your current job and make sure that you are indispensable. This may mean getting more qualifications or volunteering for more responsibility. In other words, up your game.

Hold onto your investment strategy

If you took the time to set up your investments with a financial planner you can make the assumption that they are on solid ground. A recession may cause our investments to reduce in value or stall in terms of growth but they will almost always recover when the economy recovers. The worst thing you can do is cash in your investments and stash the cash in a shoe box. Hold firm.

Get some new baskets

Every investment guru will tell you that you need to diversify your investments and not keep all of your assets in one place. This is because investments tend to have a ‘see-saw’ effect; when one asset class goes up, the other goes down. If you own a piece of property, have a fixed deposit and invest in a retirement annuity so that you are reasonably diversified. Speak to a financial planner to ensure that your plan is sound and that you have the right mix of assets for your risk profile.

Scholtz-Mare says, “The huge benefit of going through the process of recession-proofing your finances is that if the recession does not happen, you will have taken your financial wellness to new levels, so either way, you will be the winner.”

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