The year 2020 has been one of the most devastating ones for Australia and the world. Australia had been hit hard by the bushfires starting in 2019 and continuing till 2020. While the country was still recovering, the global COVID-19 pandemic came in full swing and derailed the already struggling economy.
The challenging circumstances have sent Australia into its largest federal budget deficit since the end of World War II. The budget deficit is expected to reach an all-time high of $85.8 billion for the financial year ending June 30, 2020, and deepen further to a whopping $184.5 billion into the new financial year.
It becomes more important than ever to manage your finances efficiently when approaching and during a recession. Recession entails a reduction in business activities, increasing unemployment rates, reduced income and spending, and lower demand for goods and services. It is a difficult cycle to get out of. Therefore, it requires judicious management of funds and excellent debt management to avoid falling prey to troublesome financial times.
When the possibility of a recession is approaching it’s important to do what you can to help protect your own wealth. Below we discuss some strategies to effectively manage this:
Managing your debt is important at the best of times, however, it becomes even more necessary during a recession. Recession may lead to job loss or reduced household income, reducing your ability to pay down your debts. Therefore, you must have a plan in place to reduce and pay down your debts where you can.
By minimising debts now, will enable you to have more money available to cover costs in more challenging times. It’s important to ensure you pay off your debt responsibly which also means you don’t put yourself in a compromising position now by paying off more than you can afford to.
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The most significant impact of the recession can be the loss of employment and income. This is where an emergency savings fund comes in handy. As a rule of thumb, you should aim to have savings of at least three months’ worth of expenses in an emergency fund. However, it is not always easy to suddenly start saving and create an emergency account, especially during the times of record-low interest rates.
The first step towards creating an emergency fund is to calculate how much money you would need to save. This is done by taking all the living expenses into account, including mortgage repayments or rent, groceries, kids’ school fees, insurance payments, electricity and other bills, and transport costs. After you know how much you need to save, it is highly recommended to make a budget and stick to it. You can reduce your spending on essentials by changing service providers and looking for cheaper alternatives. When you have the money for emergency fund available, the next crucial step is to research the best saving options and keep the money safe in high-interest savings accounts or term deposits.
Markets move up and down and it is very normal; a good investment strategy will factor this in. While we can’t predict when they will happen, we do know that they do occur and recommend that people are prepared for that. This largely points to the importance of long-term investments and a balance between risk and return. If your investment strategy takes these elements into consideration, and they also reflect you and your goals, then you are well-positioned to ride out the storm. If you are unsure, now is the best time to get an expert opinion.
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Diversification within an investment portfolio is also required to manage finances during the recession. Some investments may fall in value due to the challenging economic conditions, but the losses can be minimised by not putting all the eggs in one basket.
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Superannuation by design is a long-term investment, with strict rules on accessibility. Accumulators that are still working and have more time until retirement should not be overly concerned. Their employers are paying 9.5% Superannuation Guarantee Contributions into their nominated super accounts on a regular basis, which will assist navigating through shorter-term volatility and will ensure that the long term gains are still achieved.
For those that are nearing or already in retirement, it’s important to consider your exposure to risk during this period. An adviser will be able to review your super and ensure it is aligned with your life stage and goals to minimise your exposure to risk and protect your wealth during times of volatility.
Working with a financial planner will help to provide clarity around your risk profile, capital value and ability to generate income in retirement. This will allow you to make informed decisions throughout retirement.
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Now is a great time to take review your financial position and ensure you’re sticking to the guidelines of your budget so that you stay on track to reaching your dreams and goals. It’s also worth reviewing your expenses to see if you have the potential to make savings during this period. Perhaps locking in a low-interest rate could be advantageous to you.
If you would like to discuss your financial position with one of our advisers contact us today.
What you need to know
This information is provided by Invest Blue Pty Ltd (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relations to products and services provided to you.
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