Last March 2020, the International Monetary Fund or IMF has declared a global recession. Meanwhile, the GDP of the Philippines for the 1st Quarter of 2020 has contracted for the first time since 1989, that’s more than 20 years ago!
With businesses in the country mostly on lockdown for most of the 2nd Quarter of 2020, it’s not surprising that the GDP declined agin, which by definition, has put the Philippines officially under a recession. But until when? Nobody knows.
What happens during a recession?
First, because businesses see less demand, then profits will expectedly go down. And along with this, cost-cutting measures follow, which unfortunately includes laying off employees.
Moreover, the stock market normally declines. The share price of most companies goes down, if not sideways. There will be volatility, which makes it a good playground for seasoned stock traders.
Lastly, the government will most likely come out with several monetary policies to stimulate the economy. Among these is cutting interest rates, to encourage businesses to borrow money.
Many other things happen during a recession, but these three are what I consider to be the most relevant for personal money management.
What to do during a recession?
1. VALUE YOUR JOB
If you’re an employee, then it makes sense to do good at your work. Come on time, be productive, and produce quality output.
This will lower your chances of getting laid off (hopefully). Plus it also helps your company to be productive and stay afloat.
2. BOOST YOUR SAVINGS
The usual advice is to have around 6 months’ worth of your expenses as an emergency fund. If you already have this, then I’d advise you to boost it to 9-12 months just to be on the safe side in case the economy goes into depression.
Given this, then it means you should cut back on your spending. Find ways to minimize necessary costs, and eliminate as many unnecessary expenses as you can.
3. MANAGE YOUR DEBTS
Don’t go into unnecessary debt during this time. Borrow responsibly. If you can delay getting a car loan or a housing loan, then that would be good for your personal finance.
If you have existing loans or long-term debts, then check if it makes sense to restructure them when the government cuts interest rates. And lastly, don’t cosign loans for friends and relatives.
4. DIVERSIFY YOUR INCOME
It’s good to diversify your investments, which also applies to your income. Overcome the financial challenges of a recession by finding side-hustles, starting a home-based business, or perhaps, learning how to be a freelancer.
Build multiple sources of income to strengthen your cash flow. So that if unfortunately, you lose your job, it won’t have a devastating effect on your finances.
5. MANAGE YOUR INVESTMENTS
This is also a good time to reassess your risk composure. People are typically more aggressive in their investing strategies during normal times. But the recession might require you to take a few steps back and go for more conservative investments.
It’s important to review your financial goals and see which ones will be affected in the next 3-5 years. And then, start to rebalance your portfolio, and determine if you need to invest more to reach your investment objectives.
Final Tips
A recession is a normal economic cycle. Although this one is caused by extraordinary reasons that are beyond our control.
With uncertainties on how this pandemic will play out in for the next several months, it’s important to remember that in life — there are things that we can and cannot control.
We don’t have much power over the global and national economy, but we do have a lot of control over our personal economy. And that’s where you should focus your energy on.
Save more. Minimize spending. Manage debt. Increase cashflow. Invest regularly. And in the end, you’re sure to come out unscathed and in the best position when the economy starts to recover.
