Saving for a rainy day

For the first time in almost three decades, the Australian economy has entered recession. The crisis is likely to last for an extended period of time, considering the continuing consequences of the pandemic.

The effects of a recession include reduced salaries, fewer pay rises, stricter conditions for mortgages and loans, loss of employment, and reduced chances of new opportunities. While no individual can control this kind of economic drop, we can take some steps to protect our finances and weather the period.

Prepare an emergency fund

Even when the economy is stable you should have money set aside for the unexpected bad days. Ideally, you would already have some before the crisis hits. If you don’t, it’s time to invest some serious effort into accumulating it.

While there are no hard and fast rules about how much to set aside, the general guideline is to have enough to cover six to nine months’ worth of expenses. As to the format of the fund, usually people make a separate savings account or an investment account with instant access. It’s up to you whether you will trust a bank though, and you are free to look for alternative ways if you’d like.

The most important aspect of saving money for emergencies is rigid self-discipline. Do not, under any circumstances, tap into those funds for anything other than a genuine emergency. In fact, you may even want to consider grading emergencies by intensity. If it’s something you can pay for from your available funds, or if you can do a delayed payment in increments over time, consider leaving the stash alone and covering “minor” emergencies from your regular budget.

For an example of emergencies of different intensities, consider your only vehicle breaking down vs. your spouse getting badly injured in a traffic accident. You can make do without a personal vehicle for a while if you borrow one or utilise public transport, carpools, and other alternatives. You can’t make do without a spouse if you can’t help finance their recovery because you spent a chunk of the emergency stash on repairing a vehicle.

Paying off your debts

Write a list of all of your debts. Note your vehicle loans, credit cards, mortgages, and all of your personal loans. Organise the list by interest, highest to lowest rate. Do your best to pay off everything you can afford right now, to lighten the burden a little for when the situation becomes more difficult. Aim to pay off the debt with the highest interest rate before all the others.

If you’re not in a position to pay your debts off anytime soon, look into alternative options like refinancing or debt consolidation. Browse around for different lenders and see if you can find one with a lower interest rate. Also, consider talking to your lender if you’re having trouble with making payments. If your credit history is good and you’ve been consistent with your payments in the past, you might be able to negotiate a more flexible repayment plan.

Reduce your bills wherever possible

One good way to increase available money is to review its outflow. Do you need to be paying everything that you’re paying? Take some time to analyse your staple expenses and regular shopping. Obviously, you won’t be able to save on things like rent, but food, entertainment, bills, and various purchases deserve a long, hard look.

When you go grocery shopping, adopt a frugal mindset. Buy produce when it’s in season. Look for bargains and wait for discounts. Many stores will reduce the price on foods that are “ugly” or not selling fast enough.

Sit down and comb through your energy bills. What are the largest expenses? What can you optimise? Some of the biggest energy consumers in a home are the heating, air conditioning, large appliances like PCs or laundry machines, and, somewhat surprisingly, light bulbs. Monitor their use and consider upgrading some of your installations to save energy in your home as a whole.

Review your monthly subscriptions (e.g. phone, internet, gym, Netflix). Have the fees increased over time? Could you switch to a lower-cost plan, or change providers for a better arrangement?

Finally, look at your insurance. How much have your premiums grown over the years? If you’ve been with one insurer for a long time, see what other providers there are. Maybe you can find a better deal and save a few hundred.

Wrapping up

The bottom line is, you need a thorough understanding of your finances before you can budget for the recession. Reduce what expenses you can, get out of debt as soon as possible, and start setting aside money for an emergency fund to help you damage-control any unexpected crises.