6 ways to manage your money better in recession

6 ways to manage your money better in recession
PHOTO: Unsplash

There is never a bad time to start thinking about your finances, but it is especially more prudent to do so when there is talk of an upcoming recession. 

With an economic downturn likely on its way due to the Covid-19 pandemic, no one is exempt from the repercussions. From top tier to bottom rung, we must all be prepared for the ripple effect that affects everyone.

What exactly is a recession?

According to Forbes.com, it is a “significant decline in economic activity that lasts for months or even years. Experts declare a recession when a nation’s economy experiences negative gross domestic product (GDP), rising levels of unemployment, falling retail sales, and contracting measures of income and manufacturing for an extended period of time.” 

Many will likely lose their jobs, which makes it harder to pay off debts. If you have no money, you stop spending. If you do not spend, businesses will suffer.

Business owners may be forced into bankruptcy. Stocks, bonds and real estate investments may also lose their value, drastically reducing your savings or upturning your plans for retirement. In short, there is a snowball effect and the biggest concern is how to keep afloat financially during such perilous times.

The good news: A recession does not last forever.

But the prospect can be rather daunting, if not frightening. No one can foresee the future, but we can at least plan ahead a little.

Worrying will get you nowhere, but the best thing you can do is to be prudent with what you do have while you ride out the wave. 

As we prepare to weather the storm, we talk to a few financial experts to get their insights on how to get a better handle on your finances, as well as money management tips. 

1. Spend within your means

“Make more than you spend. It is really that simple,” says Lynette Lim, Director and Co-CEO of Phillip Capital Inc, of the PhillipCapital Group’s US operations.

Or conversely, “cut according to your cloth,” she adds, referring to the nugget of wisdom her businessman father, founder of Phillip Securities, had deposited with her.

“That means you should make sure you always spend within your means. If you make 10,000, spend less than 10,000. If you make 100, spend less than 100. People get into trouble when they spend more than they make.”

  • Know your financial situation

In order to ensure that your expenses never exceed your income, Valerie Tan, Head of Business Risk Management in a global bank, highlights the importance of having a clear picture of what your own financial situation looks like.

That means working out your budget, knowing what your disposable income is, and always keeping in mind the goal of reducing debt.

“Identify what expenses can be cut down and avoid accumulating debt,” advises Valerie. “For example, avoid rolling over credit card debts which attract higher interest. Always ensure that expenses – including paying off mortgages – are lesser than income.”

  • Reduce debt

She also suggests reducing debts that come with higher interest rates, such as refinancing your mortgage whenever the interest rate falls. That way, you can pay down the principal amount faster instead of only paying off the interest.

Cassandra, Head of Insurance at SingSaver, also highlights the importance of reducing debt “to prevent them from snowballing and decreasing your credit score”, she says.

“Prioritise the clearing of high-interest debt such as credit cards. Pay it off in full whenever possible, minimise the number of credits cards you have, and consolidate your debts into one loan.”

By consolidating your pre-existing debts through a balance transfer or personal loan, you can pay off your principal sum at a lower interest rate.

2. Save, save, save

In a February 2008 letter to his company’s shareholders, renowned investor and CEO of Berkshire Hathaway, Warren Buffet famously said: “You only learn who has been swimming naked when the tide goes out.”

No one wants to be caught in a pickle with their pants down, be it in a literal low-tide or in a financial downturn.

“Whether there is a recession or not, the general principle is to always have a safety net,” says Lynette. “Make more than you spend and always save. If you do not save, you will really be in trouble when things start going down.”

“Try to set aside at least 20 per cent of your income in savings,” advises Valerie. “Also, don’t forget to set aside part of the income for income tax, as Singapore income tax is only payable one year later.”

“It is extremely important to plan for the future by first saving enough, and then investing so that your income can grow,” adds Lynette.

3. Budget for the present, plan for the future

We all know the importance of making a budget and intentionally planning for the family. However, before jumping into any investments or insurance plans on impulse, Cassandra advises looking at your current family finances and cash flow.

“Just like having a child is a lifetime commitment, so is budgeting and planning for the family,” she says.

  • Save, protect, grow

After you have set aside savings for that all-important emergency fund, the next priority is to protect your assets and wealth. That means ensuring that you have mortgage protection, health insurance and critical illness coverage.

[[nid:487105]]

“Some people say ‘I cannot afford any insurance’, but have they ever thought about how the family will survive with the outstanding hospital bills or debt repayments if the sole breadwinner is gone?” she warns.

Once you have taken care of the savings and put insurance in place, one should also work towards growing your wealth, such as building an education plan for your child as well as retirement planning for you and your spouse.

“It is good to check out an education insurance plan for your kids,” she suggests. “A golden rule is to start that as early as possible, as these types of plans usually work by putting in an annual or monthly amount for 5-10 years, which accumulates, and the payout happens when the child is 18 years old (female) or 21 years old (male).”

4. Invest for the long-term

To build a nest egg for retirement, consider investing, even if it is a small amount to begin with. “Spend some thought and effort in investing,” says Lynette.

“You can start small, but it is worth to make the effort to learn more about the stock market and make long-term investments (five years or more).”

  • Build passive income

[[nid:491047]]

Valerie also recommends building passive income even when employed, so that it can grow to an adequate amount when you retire.

“Passive income refers to income which one does not have to spend time earning,” explains Valerie.

“For example, collecting rent from leasing out an apartment which covers mortgage and other expenses, so there is net positive cash flow. For investment products, it would mean something like buying a bond that pays coupons every month or buying shares that pay dividends.”

  • Buying insurance investment plans

Where purchasing insurance investment plans are concerned, Cassandra says one mistake many policyholders make is not checking on the details of the actual returns of the policy.

“To avoid having a false impression of your policy’s value, make sure to review and compare plans, which allows you to see if your money can give you better returns under a different policy,” she advises.

“Remember, even if your policy performs better than expected, you still have to account for the amount of premiums that need to be paid.”

5. Know your own risk appetite

In terms of what to invest, Lynette says there are only really two things to consider when it comes to investments: risk and returns. Before you invest, ask yourself these two questions:

  • What is my risk appetite?
  • How much volatility in the prices am I willing to bear?

“Before investing, always ask yourself, in the worst-case scenario, can you afford to lose the amount that you have invested in the stock market?” says Cassandra.

Whether you should invest during a recession depends on your current financial health. It is important to ensure that you are already in a comfortable financial position, which means having a sufficient emergency fund, a stable source of income, and little to no financial liabilities.

You must also be willing to do the research needed to make the best financial decisions. When it comes to buying bonds or stocks, Lynette says bonds provide a steadier stream of income, compared to stocks which have a higher volatility but may yield higher returns.

“The age-old wisdom is to buy low and sell high,” says Lynette. “However, since timing the market is risky, the safest approach would be to invest in a fixed amount monthly by taking out a regular investment plan.”

6. Cut your losses

We are often caught up in chasing the gains but forget that the corollary is to minimise potential losses as well. When it comes to risk management, it is two sides of the same coin.

“You must overcome loss aversion,” explains Lynette. “Many people have a tendency towards loss aversion, meaning we do not want to lose money, so we keep holding on to the stocks that are losing money and then selling the stocks only when we make money.

[[nid:482474]]

The problem with that is, you may end up holding stock that never regains its value, resulting in a bigger loss than necessary.

“Most people get in trouble when they do not dare to cut a losing trade,” shares Lynette. “If you are losing money, you need to adopt a rule to cut the losses.

That means setting a loss parameter before you even place a trade, say 20 per cent. So that if your stock drops 20 per cent, you will sell the stock no matter what.”

By cutting a losing trade, you are cutting your losses. After all, a good investor must know how to manage risk, and risk management means knowing when to sell even when your stock is losing value. The objective is to limit your losses, which is equally important as not limiting your gains.

For those who want to dabble in the stock market, Cassandra cautions, “Those investing during a slowdown should maintain a diverse portfolio to lower the risk from sudden market shocks.”

For the latest updates on the coronavirus, visit here.

This story was first published in The Singapore Women’s Weekly.

This website is best viewed using the latest versions of web browsers.