The past two years have been uncertain, to say the least, and while Australia economically seems to still be going strong, generally the economy follows an economic cycle where there are both upturns and downturns every five or so years.
A recession is technically when an economy will experience two-quarters (six months) of negative growth. Australia has, surprisingly, not experienced a conventional recession since the '90s.
What Could A Recession In Australia Mean For You?
Recessions are no fun for anyone, but if you have a stable job then you are in a fairly safe position.
However, when it comes to pay rises, selling property (though, they can be a great time to buy), shares, or ETFs it can mean trouble. During the GFC, some shares went down by 40 per cent or more, so you certainly wouldn’t want all of your savings in those channels if we hit a recession.
Unemployment typically also increases as businesses stop spending money, which means that the businesses who usually receive the money have less to spend and the flow-on effect continues.
How Can You Safeguard Yourself From A Recession?
There are a few things you can do to ensure you have a “rainy day” fund if we do hit a recession.
- Work out how much money you need to live on per month. Save two–three months’ worth and put it into a saving account that accrues interest. This is a safety net/cash-on-hand plan that you can use if you really need it.
- Once you have that money saved, it doesn’t hurt to start investing, be it in ETFs, shares, property, property bonds and the like. If a recession is looking likely, consult a financial advisor to see if you should pull it out and push it back into savings.
- Check your super and see what your fund is investing in if a recession is occurring. Some funds will invest in stocks that are likely to crash so you may want to ask them to invest in something else.
- Go through your direct debits and make sure you are not spending money on subscriptions, services, and luxuries that you don’t need.
The big thing to remember is that the economy goes in cycles, so it is always good to have a rainy day fund or a backup plan. Better to plan for the worst so you can ride out the situation with less stress rather than having nothing to fall back on during that time.
Gerry Incollingo is the Managing Director of LCI Partners in 1998, an established accounting, finance and legal firm based in Parramatta. Since that time, the firm has expanded with six divisions and is now based in Sydney, Parramatta, and southern Sydney.
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Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.