Downturn dollar savers: Make the most of your cash in a recession
If you've turned on the TV or picked up a newspaper lately, the words 'recession' and 'downturn' probably have you working up a cold sweat over your finances.
Speaking exclusively to Resimac, financial educator and adviser, Lisa Dudson, shares her insights on how to manage your cash when there's a dip in the economy.
1. Add to your emergency funds
An emergency fund is the money you've saved up for a rainy day, with the sole purpose of helping you get through financial hardships. When the economy starts to dip, our jobs and our income can be put in jeopardy, which is when a safety net of emergency funds comes in handy.
According to Lisa, those who have emergency money are much less likely to fall into debt.
"You should save at least three to six months' worth of living expenses in this fund."
2. Pay down debt
When it comes to debt, there's good debt and bad debt. Good debt is when you're paying off something that gives you a good return on investment, such as your mortgage or Student Loan Scheme.
Bad debt is commonly associated with personal debt, for example overdue credit card bills, unpaid fines, or a car loan.
"Pay off your debt with the highest interest rate first and pay off as much as you can possibly afford. Further increase your debt repayments by cutting out the things you don't need to spend on, including entertainment subscriptions, gym memberships and takeaway coffees. Every bit counts!" says Lisa.
To figure out if you can afford to top up your debt repayments, add up all your current monthly expenses, including debts, and subtract that number from your monthly income. If you still have money left over, consider adding a percentage of that to your regular debt repayments.
If you have a home loan, take advantage of lower interest rates by packaging all of your existing debts (e.g. credit cards, car and personal loans) into your mortgage, so that all your debts are gradually paid off through your regular mortgage repayment.
According to Lisa, debt consolidation should be seen as the first step and budgeting and planning must happen alongside it.
"For debt consolidation to work, you need to be totally committed to paying off your debts and have a plan in place to do so. It can save you money due to the lower interest rate you pay, but only if you pay the debt off over a short period of time. Also, it doesn’t deal with the actual problem of overspending," she says.
3. Keep investing
In a recession, some asset classes are hit harder than others, so it's important to reassess your investment portfolio, cut any deadweight and reinvest where there's opportunity to grow.
If you're a share investor thinking of investing in new avenues, ‘safe industries' or blue-chip stocks, are a good option for those looking for a ‘slow and steady' approach. With this strategy, it's important to adopt a long-term mindset – your investments may increase or decrease overnight, so try to stay away from focusing on the day-to-day price movements.
"When looking at industries and companies to invest in, do your research: what they do, where they do it and how. In particular, look at companies and industries that are showing innovation and leadership," explains Lisa.
4. Invest in yourself
COVID-19 has accelerated new ways of working, and as a result, caused a shift of in-demand skills currently needed in the workforce. With these rapid changes occurring, it's an ideal time to diversify or up your skillset and increase your employability.
Digital skills in particular are increasingly in demand. There are plenty of short to long-term training courses on offer, including Microsoft Learn and The Institute of Digital Marketing New Zealand, which are available to attend online outside of regular work hours.
Another way to invest in yourself is to increase your retirement savings. Most employed KiwiSaver members contribute the minimum rate of three per cent of their before-tax salary, however, you can choose to increase this to four per cent, six per cent, eight per cent or 10 per cent, and reduce it back to the minimum at any time.
5. Invest in property
With mortgage rates low and affordability looking better than the global financial crisis in 2007-08, buying a property could help you get ahead financially. According to the Real Estate Institute of New Zealand, August median house prices across New Zealand increased by 2.4 per cent since July and 16.4 per cent year on year to $675,000.
Property is tangible 'bricks and mortar'. It physically survives a market meltdown, unlike 'invisible' assets such as shares, which can fluctuate when businesses aren't performing well When this happens, houses still stand and have their tenants paying rent
"Choosing how much to invest is a personal choice. It comes to down to how much money you want to spend on today's lifestyle versus how much you want to save for the future. It's important to align your investment strategy to your individual short, medium and long-term goals," concludes Lisa.
The opinions expressed in this article are the opinions of the author(s) and not necessarily those of Resimac. The above is general commentary only and is not advice tailored to any individual's financial situation. We recommend seeking advice from an insurance or finance professional before implementing changes relating to your finances.