By Essie Bester
There is little doubt that we are in a recession. We will have to wait to see how bad it is and how long it will last. Financial experts like Dawie Roodt, chief economist at the Efficient Group, is of the opinion that there could still be a long and painful road to recovery ahead.
The following things happen during a recession:
Home prices drop.
The share market drops.
Household, business and government debt escalates.
From a financial planning perspective the only things that really matter are whether you loose your job, whether you loose hours and whether your income decreases for whatever reason.
Whether the share market drops or the value of your house decreases is of minor importance because the value of assets are volatile. As soon as the economy bounces back, so will your investments.
Your first priority during a recession should therefore be to retain your current income – this will prevent your debt from accumulating and that you lose your house.
As long as you can retain your income you ought to survive the recession. Make sure to make yourself indispensable at work by remembering that you employer does not pay you for your time but for the value you offer. Therefore, make sure that you add value.
However, retrenchments are a reality. See to it that you have a plan B if you are worried about the financial wellbeing of the company for which or the industry in which you work. Possible solutions could include that you start looking for another job or that you take out an income protection policy. It is now also time to start honing your skills – perhaps you should consider taking a short course or acquiring further qualifications.
- A second source of income
Develop different sources of income so that you are not dependent on just one source that could perhaps be lost. This means that you should have different types of businesses or sources of income that are independent of each other and that could replace each other if one becomes problematic.
It has become more important than ever to know how you spend every rand and cent so that you can make better decisions. Experts recommend that you use an envelope system for a month or two to help you manage your disposable expenditure optimally.
This is an easy way of counting your rands: Money for food goes into the food envelope, money for fuel into the fuel envelope, and so on. If you want to eat out the money must come from the food envelope and not from the fuel envelope.
- First cut down on luxuries
Think carefully before cutting down on something that will affect your long-term financial position.
Reconsider all non-essential accounts and expenditure. Draw up a budget and know what the minimum is that you need to survive every month. All extra expenses and luxuries must be cut out immediately.
This means that you will perhaps have to:
switch off your satellite television or switch to a cheaper package;
buy fewer new clothes or downscale to cheaper shops;
eat out less frequently (and buy less fast food); and
consider a lift club or public transport, grow your own vegetables and use water and electricity sparingly.
- Save even more on the following
It is easy to save on things such as money for retirement, your children’s education or life insurance. Over the short term cutbacks like these will mean that you can keep up your lifestyle, but later on this could be financially destructive.
Things that one should not simply cancel, include the following:
savings for long-term goals such as your children’s education
car and home insurance
Take a look at your insurance premiums. Make sure that it does not cover unnecessary items, but that new purchases are covered. Compare quotations from two or three insurers to see if you could lower your premiums.
- Put away your credit and store cards
Financial practitioners warn people not to use their credit and store cards to fill gaps. Living within your means in the present state of the economy is much easier than having to navigate your way out of deep debt later.
Beware of unexpected expenditure you could have avoided, such as:
traffic fines – stick to the speed limit and don’t park illegally; and
driver’s and car licences – renew timeously.
The emergency fund by means of which you can sustain yourself should your salary be cut or if you are retrenched, should keep pace with the risk posed by the economy. It is advisable to invest at least six times your monthly salary in an emergency fund. If you do not have an emergency fund, begin saving for it as soon as possible.
Finally, keep in mind that a recession is not the end of the world but that fear can paralyse rational thought and make you take emotional and negative decisions.