MoneyMagpie

Jan 31

How to survive another recession

No one wants to think that another recession could be around the corner. Unfortunately, the way the economic cycle works means that downturns are inevitable. In uncertain and difficult times, there’s always the risk that a downturn becomes a full-on recession.

Many of the experts predict more difficulties ahead, so it’s important to be financially prepared. It’s worth taking steps to secure your finances, so you can survive another recession.

Have an Emergency Cash Fund Ready

If the economy takes a hit, you or someone in your household could see their income fall – or disappear altogether. It means you may need cash handy to cover everyday expenses. Every family should have an emergency fund to cover three months of expenses. This needs to be in a cash account that you can easily access. This can be a savings account or a cash ISA. Check out our guide to setting up a fund to cover emergencies.

Find an Income Source to Fall Back on

If you lose your primary source of income, you need to have a ‘plan B’ ready to roll. Fortunately, there are plenty of alternative ways to make money. We have a huge number of suggestions in the Making Money section of our site. You might want to consider:

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Diversify Portfolio with Non-Cash Investments

While the day-to-day issues will eclipse all your other concerns, you also need to consider your savings and investments. Some people will need to hold as much of their portfolio as possible in cash, because they have a very short investment time frame and a very low tolerance for risk. Everyone else, meanwhile, may need a rethink. Central banks will often drop interest rates during a recession, and cash is a miserable place for your money at any time when interest rates are low. If inflation is high at the same time, it means that after inflation the vast majority of accounts will actually be losing money.

Diversification tends to mean holding much of your long term investments in share-based funds and bonds. Index-tracking funds can be a useful low-cost option. Exchange traded funds are also proving increasingly popular.

During a recession, when companies are struggling, shares can suffer. It’s not guaranteed: we have seen plenty of instances where the UK economy has been struggling and the stockmarket has gone from strength-to-strength. However, it is a risk. Traditionally experts recommended international diversification, which can be incredibly useful unless we’re faced with another global slowdown.

This doesn’t mean that anyone should dump all their share-based investments. Past performance has shown that those with long-term horizons can ride out the storm, and see a recovery. However, it’s worth considering other investments too.

In the worst of times, there tends to be a rush to gold among investors. It’s an odd investment, because it has no intrinsic value. Investors just tend to use it to shelter investments when everything else is going through the floor. However, some investors may want to make gold part of their portfolio as a hedge against the risk of everything else heading south.

Financial preparedness many not come easily and naturally to many. You may struggle to find space in your household budget to build up an emergency fund. However, it’s worth drawing up a budget to find that space, to prevent a recession becoming your own personal financial crisis.

 

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