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Recessions and Depressions

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What to do during a recession - and don't panic!

Just the words recession and depression sends shivers down the spine of economists – and undoubtedly the global economic crisis of 2008 will be remembered by all for some time due to the global panic it caused.

And of course, recessions can be very difficult for normal people like you and me, so it’s important to understand what these financial down-turns are all about and how you can manage your finances through these financial times. A

nd it doesn’t have to be a global crisis to affect you and your finances – a local slow-down or even the collapse of a particular company you hold shares in – can all cause you financial pain.

But first some definitions.

A recession occurs when there is a general downturn or slow down in the economy – people aren’t earning as much, or spending as much – and is considered a ‘normal’ and manageable part of the business cycle. After some time, the economy recovers and the cycle starts again.

A depression is just a degree worse, and is typically when the economy slows by more than 10%. This can result in job losses or significant cuts in salaries, inflation (or deflation) and reduced values of property and investments.

But whatever the reason for a recession (or a depression), it just means that you may have less money available than you did, and the money you do have won’t go as far as it used to. And even though recessions typically only last 2-3 years, these can indeed be tough times for normal people like you and me.

But there are some things you can do to help yourself through.

of all, DON’T PANIC! Recessions and depressions have happened before – and the world has got over them and moved on. We WILL get over it – but it may take a few years (or maybe more) to really get back on track. So:

  • Don’t panic sell – unless you have to. The horse has already bolted when it comes to selling to avoid losses. If you sell now, you WILL lose money.
  • Hold onto property, unless you can’t afford to keep it – property will almost always return its value once the recession/ depression has passed. Be aware though that this may take some time.
  • DO seek financial advice on your particular assets and investments – there is also a risk attached to holding onto your current investments (particularly stock). Get professional advice on your stockholdings and the best strategy for minimizing your losses.
Secondly, since in a recession earning more money could be more difficult or things may cost more, the emphasis needs to be on making the most of what you have. So budget like you’ve never budgeted before!

  • Scrutinize your spending – go through your last credit card statement and see where your money really went. And then…
  • Cut Costs – cut back on unnecessary spending.
  • Cut back on the use of utilities – save power, water, walk to work and reduce your use of the phone. You’d be surprised how much these utilities cost you.
  • Don’t be tempted to cut back on insurances – it’s times like these that you need to protect what you have.
  • Prepare a new budget to see you through these tough times – and prepare a ‘worst case’ scenario. What will happen if you lose an income or inflation/ interest rates get out of hand?
Over the past decade of relative affluence, our spending habits have become rather decadent. So a bit of reigning in of expenditure is probably a good thing for improving long term spending habits.

And thirdly, take advantage of the opportunity to invest in some real bargains! If you have any spare cash:
  • Pay off your debts.
  • Invest in Gold.
  • Invest in carefully selected property, if you don’t need to take out a significant mortgage to do so – and pay off any mortgage as quickly as you can.
  • Invest in carefully selected dividend stocks – see a financial professional for advice in this regard.
And don’t forget about charity! If you think you’re doing it tough, just think about the people out there who are even less fortunate.

Note: It is important to seek professional financial advice before investing in anything!

Just remember that in 5 years time you’ll be able to look back at today’s financial crisis and evaluate how you handled it. Make sure you can give yourself a good financial report by making decisions now based on best financial advice.
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We are not certified financial planners or advisors. The information in this website is general information only. Always consult a licensed financial planner before making any finance or investment decision.

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