With Australia now officially in recession, it’s more important than ever to safeguard your finances.
You can’t control what the economy is doing, but you can take precautionary measures to protect yourself in case you lose your source of income.
Here are six ways to stay financially fit during an economic downturn.
1. Boost your emergency savings
Aim to have around 3-6 months’ worth of living expenses set aside. This amount should be enough to cover rent or mortgage payments, bills and essential purchases like food and medication.
With fewer opportunities to spend during the pandemic, you can use this as an opportunity to give your savings a boost.
Working from home? Take the money you would usually spend on public transport, lunch or coffee and put it towards your rainy day fund instead. For instance, you might spend $50 per week on public transport, $50 on lunch and $20 on your morning coffee run. Already that’s $120 saved per week.
Do the same for any funds you would otherwise put towards live entertainment and holidays. It may not be fun, but prioritising your savings can prevent you from having to resort to borrowing money if you lose your job or face an unexpected expense.
2. Prioritise your debt payments
Debt can come in both “good” and “bad” forms. If you take on debt to help build wealth (e.g. a mortgage or a business venture), this is considered “good debt”. If your debt costs you money in the form of high-interest repayments, this is typically classified as “bad debt”.
During a recession, it’s important to pay off as much bad debt as possible. One way to do this is by arranging your debts from the highest interest rate to the lowest. From here, pay the minimum amount on each of your debts except for the one with the highest rate. For the debt with the highest interest rate, try and contribute as much money as possible each month. Once you have repaid the debt in full, move on to the one with the next highest interest rate and so on.
Prefer to take the debt consolidation route? A balance transfer credit card can help. This type of card offers a low to 0% interest rate for anywhere between 5 and 26 months. You can transfer existing debt across from multiple cards or accounts and pay it off quicker under a lower rate. A debt consolidation loan works in a similar way, only you can transfer existing car or personal loan debt to a loan with a single rate.
Keep in mind that no two debts are the same. A strategy that works for one person may not work for another.
3. Diversify your income stream
Even if you have full-time work and a decent salary, nothing is ever guaranteed during a recession. With this in mind, it’s smart to increase your income where possible. There are a number of ways you can do this – the trick is to think outside the square.
Freelance. Depending on your profession, you may be able to pick up some professional gigs on the side.This might include writing, consulting work, graphic design or carpentry. You can do this through sites like Airtasker and Upwork.
Utilise your existing assets: Rent out your spare room, car space or vehicle for a fee through sites like Airbnb or Parkhound.
Sell items online: Make some extra cash by selling items you no longer use through sites like Gumtree, Facebook Marketplace and eBay. This can include anything from furniture to electronics.
Ask for a raise: If you haven’t received a salary increase in a while, now could be a good time to ask. Just be mindful of your timing – not all businesses may be in the position to offer more money right now.
4. Get your mortgage funds out of redraw
If you’ve been paying above the minimum amount into your home loan and the funds are going into a redraw facility, consider withdrawing them. If you’re unable to pay off your mortgage, some lenders may refuse a mortgage holiday until your redraw funds have been used up. Others have been accused of taking cash from redraw accounts to reduce the risk of mortgage default.
Transfer any surplus mortgage funds to a linked offset account. This will save you the same amount in interest, with none of the associated redraw risks.
5. Find a cheaper rental
Rental vacancies have soared during the pandemic as people return home or move in with others to save money. This has left landlords with little choice but to drop their asking price in a bid to lure tenants. As a result, Australian rental prices fell by around 3.9% for apartments and 1.9% for houses throughout the June quarter, with prices cut by up to $100 in some capital cities.
Research similar properties in your area to see what the market is doing. If prices are dropping, consider negotiating your rent price with your landlord. If they’re unwilling to meet your demand, and your lease is up for renewal, consider moving elsewhere. A rent reduction of just $50 per week can save you $2,600 over a 12-month period, while a $100 reduction can save you $5,200 per year. If you really want to save, consider moving in with others to split costs even further.
6. Invest for the long term
If the market dips and your investments go down in value, try to remain calm. If you don’t sell, you won’t lose any money. The sharemarket is cyclical, and there will be other opportunities to sell at a profit down the track. On the other hand, if you buy while the market is down, you could reap the financial rewards later.
Try and focus on maintaining a diversified portfolio, with investments spread across a range of asset classes such as shares, bonds and cash. Keep in mind that even with a well-diversified portfolio, your investments are still likely to experience periods of underperformance. The trick is to remain calm and maintain a long-term investment strategy.
Bessie Hassan is a money expert at Finder.
Are you a millennial or Gen Z-er interested in joining a community where you can learn how to take control of your money? Join us at The Broke Millennials Club on Facebook!