The post-pandemic rebound in the domestic and global economy is almost over and most major economists and agencies expect a sharp slowdown in economic and corporate earnings in the world's major economies in the 2023 calendar year. The debate is whether it will be a painful hard landing or a less painful soft landing.
The Indian economy is expected to be an outperformer compared to advanced economies in North America and Western Europe but it will also face a slowdown. India’s merchandise exports have already started declining and the latest index of industrial production showed a four percent year-on-year decline in manufacturing in November 2022.
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A decline in economic activity will soon filter down to the corporate level leading to pink slips and salary cuts.
Recessions are part of the economic cycle but they can have a profound effect on your family's financial future. In the worst case, this may force you to completely change the direction of your life. To help you avoid getting caught in the cold, and successfully sail through this unexpected scenario, here are five strategies to recession-proof your finances.
Create an Emergency Fund
While financial emergencies can knock at our door anytime, an economic recession greatly increases the chance of a big loss in income or even a job loss. Many families had to face this emergency from April to June 2022 and no one wants to relive those times. While the lockdown-induced economic recession was sudden and completely unexpected, you still have time to prepare for the upcoming recession.
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This will help you to protect your family in the interim till you find a new job or restart your life. The fund will also help you to avoid falling into a debt trap or make a firesale of valuable assets such as land, house or family jewellery.
And if you are lucky and come out of the recession without any major financial shock, then the fund can become your retirement fund or you can use it to make big-ticket purchases such as buying a new car or a house. Note that as a thumb rule, you should invest in safe and liquid instruments such as bank deposits or government bond funds for your emergency fund.
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Pre-pay your debt
Interest rates on all kinds of loans are already rising and they could go up further even if the economy faces a slowdown. This is leading to a growing mismatch between income and loan EMIs. The gap will become unbearable if there is a loss of income due to the economic recession.
Given this, prepaying your debt in full or partially, will help you save on the interest amount. Achieving complete freedom from debt, especially high-interest debts like credit card debt, personal loans, and high-interest borrowings from local money lenders will also provide you with the flexibility and confidence to face the economic recession.
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Repaying high-interest loans also helps you to improve the CIBIL Score that you leverage later on to take loans for investing in income-generating assets such as a second home or you can increase your savings.
Spread your investments
Investing your entire investment capital, or a major part of it, in one asset class or sector, may increase the amount of risk if that particular asset class or sector underperforms. Apart from a significant loss, it may also lead you to lose your entire capital.
Within equity, you should increase your exposure to relatively defensive sectors such as pharmaceuticals, FMCG and IT Services and cut exposure to high beta sectors such as banking & finance, real estate and capital goods. Above all, it is of utmost importance to continue your investments, focus on long-term objectives and don’t make knee-jerk decisions based on short-term volatility in your portfolio.
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It is well known that insurance is the best protection against emergencies. While there isn’t insurance for every emergency, there are many options to cover ourselves for healthcare, accident, theft, fire or life. An emergency may lead you to lose a major portion of your savings and completely upset your long-term financial goals.
While buying an insurance policy, especially life insurance, it is extremely important to consider the amount of coverage, premium, term, tax benefits, exceptions and all other terms and conditions that apply while filing and settling the claim. In the current scenario, when we are staring at a recession, it is important to insure your life and assets to the maximum extent possible.
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Be ready for a career switch
Economic recessions can be unpredictable and even the brightest can lose jobs or face a pay cut. Already, lakhs of professionals at Amazon, Twitter, Meta, and Google, have been laid off and the risk is that this may soon spread to other sectors including manufacturing and financial services, which are very big in India.
You should also brace up for a career switch which may include working in a completely new profession or industry.
As the old saying goes, the best time to prepare for a rainy day is when the sun is shining bright. So don’t ignore the early signs and prepare yourself and your finances for what’s coming our way.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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