Recession-proof your personal finances to brace yourself for tough times.

The Covid-19 pandemic has brought with it many rules and restrictions that have disrupted our lives. While some such as the necessity of wearing face masks have little impact on our finances, there are others such as the Movement Control Order (MCO) that deal a hard blow on personal finances of many Malaysians.

The government is distributing relief services and attempting to support Malaysians who are most exposed to financial difficulties. To ease the strain of fellow Malaysians, financial institutions were also advised to provide credit moratorium, restructuring and rescheduling services.

Taking precautionary measures to secure your finances will make a world of difference, so make sure you take any, or all, of these steps to recession-proof your finances before the next financial downturn hits. These are some steps to help with personal money management during a pandemic and possible recession.

Tip #1. Think Through Major Financial Decisions

A major financial burden would make your life difficult and wreak havoc. This could be anything from weddings, getting kids, buying a car, buying a house, and any form of impulse buying. Therefore, it is best to prepare carefully, measure the risks and postpone your major plans for the time being if the risk is too great.

There are plenty of ways in which you can begin to live frugally. If there are two cars in your household, consider limiting them to one and make use of public transport. This option alone could save you RM9,000 annually. Or, if it is necessary to have two vehicles, consider selling one of the cars to save on the cost of petrol for a more fuel-efficient sub-compact vehicle. You may also look at your home or apartment being downsized, spending less on food, and cutting back on your mobile phone plan.

Tip #2. Have an Emergency Stash

Our jobs and our wealth can be put at risk when the economy begins to fall, and that is why having an emergency fund is important when you plan for a recession. In short, the money you have invested for the sole purpose of helping you get through your day-to-day life during financial difficulties is an emergency fund. It is your financial backup plan.

Emergency savings would give you a safety net to fall back on, so you can ride the wave and recover from the recession if your hours have been cut back, you have lost your work, your company is not making much money, or you have made some bad financial decisions.

Difficult times always last longer than you would expect, so debts are always greater than expected from these times. Since most individuals are used to surviving on their entire paycheque, they have nothing left to repay this debt. So, to repay the debt at their current income level, they have to either boost their income or drastically decrease their lifestyle.

Tip #3. Pare Down Debts

A debt load is just that: a burden. And these high debt payments would only bring more stress to an already difficult situation during a recession when work is scarce and liquidity is tight. So it’s time to take stock of your financial condition and all your commitments and make a plan to pay off your debts.

It can be hard to cover day-to-day expenses during a recession, let alone debt repayments, and this can cause your debt to spiral out of control. It is very dangerous to carry high levels of debt, as a small shift in external conditions may impact your ability to pay off your debt. A job loss or an interest rate hike combined with banks tightening credit limits could change that for the worse, while you might be able to handle payments now.

Tip #4. Establish a Budget

A key step is to build a budget that accurately represents the money coming into your household, and where that money is intended to go including successfully pay off your debts.

Besides tackling debt as aggressively or preventing your debt from growing, having a budget will help you identify spending areas that you can cut back on. This also helps you work on paying off your debt faster or growing your investments with more of your money.

Tip #5. Diversify Your Income

Getting many income sources can help. You have other sources to fall back on to help keep you going if one income stream begins to decline or gets removed. In fact, if your partner works in a different sector than you, you have some income diversity right there.

Diversifying your income doesn’t always mean getting a second job. You can look at several different options if you want to spread your wings and pull in even more money, such as renting a room in your house, renting a space in your garage, or going so far as to buy and rent a property for income.

You can consider having a weekend job if you have a reasonably flexible schedule, and if you have a very strong skill set or are improving one, you can look for opportunities to cash in on those skills. For starters, you can look at writing independent articles and blog posts if you’re a strong writer.

Conclusion

While you may have heard the same recommendations repeatedly as we brace ourselves in these difficult times, of more importance to note right now are your answers to these questions – How many of these tips have you already taken advantage of? Are you on the right track? Do you need help? When should you ask for help?

Your financial well-being is in your hands.

 

Have you taken charge of recession-proofing your personal finances yet? 

 

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