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.
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
But there are some things you can do to help yourself through.
First 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:
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!
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.
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
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.
- 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?
And thirdly, take advantage of the opportunity to invest in some real bargains! If you have any spare cash:
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.
- 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.
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.