The word ‘recession’ sends a chill down the spine of economists and investors alike. Since its independence, India has witnessed its share of recessions with the oldest one dating back to 1958. The Balance of Payment Crisis occurred when monsoons had devastated the agricultural sector, prompting increased imports. This depleted the country’s foreign reserve to nearly half.
Between 2020-21, India witnessed a sharp drop in its Gross Domestic Product (GDP) due to the outbreak of COVID-19, leading to nationwide lockdowns. With cases of mass unemployment, inflation, and increased poverty running rampant across the nation, many of us were unprepared to deal with such situations.
The Impact of Recessions
Nonetheless, people across the globe have learnt the importance of financial preparedness. Even if you came out mostly unscathed from the recent recession, that may not be the case next time.
Here’s how a recession in India could affect you.
- The rise of unemployment could leave you without a stable income
- You may be forced to dip into your retirement savings, due to insufficient emergency funds.
- The lack of customers may force your business to file for bankruptcy
- Banks and other lenders will limit sanctioning loans
- The shortage of income will make living on rent extremely challenging
This is a very bleak reality that many have already suffered, but you can still prevent yourself from going through it. You can start by studying recessions and analysing their patterns. History suggests that recessions usually last between a few months to a couple of years, making it essential to building a strong plan.
Ways to Make Yourself Recession-Proof
By taking the proactive approach and forming a plan beforehand, you can make yourself recession-proof to these conditions.
Cut Back on Your Expenses
Recessions are notorious for lack of job security, and you could lose your job during a string of mass layoffs. So, boost your savings reserve by adopting a frugal lifestyle. Restrict yourself to fewer impulse purchases and start inculcating the habit of financial prudence.
You could try using public transport, switch to cheaper alternatives, avoid using products from expensive brands, and so on.
Strengthen Your Emergency Fund
As you take a farsighted way of managing your expenses, it’s time to divert them towards your emergency fund. Even if you’re repaying debts, you need to re-route your savings between the two. Ensure that your emergency fund can cover at least 3 to 6 months’ worth of expenses.
Choose to stash your money in high-interest Savings Accounts, or easy to liquidate investment instruments like Fixed Deposits and Mutual Funds.
Enter the Bear Market
Recessions are scary times for investors, with the downward spiral of falling stock prices leading to losses all around. But there is a silver lining here. A recession gives you the perfect opportunity to purchase stocks that previously held a consistent track record of performing well in the market.
The reduced costs will give you the rare chance to buy some of the most coveted stocks. Create a stock wishlist to keep track of dwindling prices.
Pay Back Your Debts
One of the biggest obstacles, when it comes to saving, is debt repayment. Start focusing on paying off these obligations to avoid being crushed under them during a recession, without any additional income.
Build an order of priority, starting from high-interest debts. If you receive a bonus, performance pay, or any surplus, use it to close these debts sooner.
Diversify Your Investment Portfolio
After the recent bout with the COVID-19 led recession, investors were left with investment portfolios that lost a considerable portion of their value. Start wisely choosing stocks across diverse sectors to avoid incurring extreme losses during market crashes.
Additionally, you can also mix things up by choosing to invest in different types of investment instruments.
Financially secure yourself, and your family, by adopting these methods to weather unpredictable scenarios like recessions that could displace your finances.