Recession-proof Your Finances

Make moves to help you thrive after the downturn ends.

“Recession” and “Inflation” are words you see in the news almost every day. While these terms may make you anxious about the future, it’s important to remember that the economy moves in cycles of ups and downs - this means that recessions don’t last forever!

In the meantime though, you may need to take steps to tackle economic effects like rising interest rates and cost of living. That’s why it’s important to take steps to protect your finances during the downturn, so you can set yourself up for success when times start looking better. But first…

What do “recession” and “inflation” mean?

Simply put, a recession occurs when a nation experiences negative economic growth for 2 consecutive quarters. Whereas inflation is a general rise in prices leading to a reduction in purchasing power - meaning your money can now buy less things than before.

What are some things you can do to protect yourself financially during times of recession and inflation?

1. Pay off high-interest debts ASAP

To tackle inflation, governments may raise interest rates to make the cost of borrowing money more expensive. Unfortunately this could affect interest rates for your personal loans too, like home/car loans and credit card debts, which can go as high as 28%. It would be wise to clear these types of debts quickly before they snowball due to compound interest.

Another option to consider is refinancing your home loan to a fixed rate package, to lock in interest rates for the next few years.

2. Manage your spending

Learning to make do with less will help you adapt to a thriftier lifestyle when recession hits. Cut down on unnecessary expenses to increase your savings, and also give you more money to invest. Set a budget to help you control spending -  here’s a handy guide to get started! One useful tip: keep track of your finances easily with UOB Insights on your UOB TMRW app, to stay on top of your cash inflows and outflows. 

3. Beef up your emergency funds

Retrenchments are a real possibility during recessions. While you can’t control if it will or won’t happen, you can prepare for the worst by setting aside an emergency fund of 3-6 months’ worth of expenses. Do ensure that your funds are placed in low risk assets that are liquid (withdrawable within 3-5 days max.).

4. Create more income streams

As mentioned above, layoffs are common during recessions. Just relying on your job can be risky - it’s prudent to build multiple streams of income to fall back on should you become unemployed. Consider taking up a side hustle or building passive income to bolster your finances.

5. Invest for the long-term

If you’ve put a portion of your money into investments, a downturn can be worrying if you see the value of your portfolio dropping. Focus on the longer-term outlook and remember that markets perform in cycles - don’t panic and start selling when prices are low! There will be plenty of opportunities to do so when markets recover in the future. With UOB SimpleInvest you can continue to grow your money from just $100 a month, and track your investments easily using the UOB TMRW app.

6. Diversify your investments

You’ve heard of the phrase “Don’t put all your eggs in one basket.” This is especially true when it comes to investing! Go through your portfolio and make sure that it is well balanced, to reduce risk and volatility. In particular, try to make sure that your investments are spread out across different industries and asset classes.

7. Keep your credit score high

As interest rates rise during a recession, it might become more difficult to secure a loan when you need one (e.g. buying a new home). Maintaining a good credit score makes it more likely to get your loan approved - you can do that by paying bills on time and keeping debt levels low.

Recessions don’t need to be scary

You may not be able to predict when a recession might occur, but what you can control is how you prepare for tough financial times. Take preemptive actions now to safeguard your finances, so you don’t have to worry when stormy weather hits.