Recession is a word that no one likes to hear. While technically it is associated with a significant decline in economic activity over two consecutive quarters, a recession is characterised by uncertainty, fear, and pain, manifesting in businesses closing, bank failures, slow or negative production, high unemployment, a fall in property prices and an increase in home repossessions.
In the news lately, we are being told to brace ourselves for higher interest rates and to strap in for a challenging ride ahead in 2022-2023. As we know, there have been many bumps along the road over the last two years due to COVID 19 pandemic, including a technical recession during the east coast lockdowns, which were lessened by Job keeper, Government handouts and other initiatives. That said, with high inflation, the prospect of sharp interest rate rises, and the Governments reduced capacity to take on more debt, there are a few telling signs that we need to start preparing for uncertain times ahead.
What can I do?
‘All you need is the plan, a road map, and the courage to press on to your destination’ (Earl Nightingale), so that you can put yourself in a good position to ride out any volatility in 2022-23.
|Review your budget – where your money is going?
|Even if you don’t have a budget, it is good to understand what you are spending and what can be trimmed. Review all your discretionary and mandatory expenses such as utilities, telecommunications, insurances, streaming services etc. Are you getting a good deal, and can you do better?
|Interest Rates – are you prepared for rising rates?
|It’s probable that interest rates will be lifted from June 2022 onwards, so now is the best time to review your home loan (also understanding when your fixed rate ends). Refinancing to a much lower variable rate than your current lender provides you with a greater buffer when rates rise.
|Debt Reduction – am I reducing my bad debt?
|Carrying large debt in a recession may put you under stress. Reduce your debt where you can, particularly high interest and non-deductible debts such as credit cards, personal loans and so on. Start with the highest rate first.
|Pay more (& get ahead) – can I build a buffer?
|If you can make some extra repayments on your home and personal loans, this will help you to provide a buffer but more importantly prepare you for higher repayments when they occur.
|Emergency Funds – do I have enough?
|Whatever you call your savings, it’s a good time to get more money into your account so that you have a larger buffer and money you can access if things become difficult. Ideally you could strive for 6 months’ worth of net salary payments.
These are a few financial hygiene factors that we talk about with our clients at FWD financial, ensuring their finances remain healthy so they can know, grow and protect their wealth.
At FWD Financial, we are here to help. We can help you develop a relevant and sustainable budget, review your personal insurance, super, investments or even refinance your existing home or investment property loans.
The articles in this newsletter are of a general nature only and are not to be taken as recommendations as they might be unsuited to your specific circumstances. The contents herein do not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions. Your adviser or other professional advisers should be consulted prior to acting on this information. This disclaimer is intended to exclude any liability for loss as a result of acting on the information or opinions expressed.