A recession is the name we give a downturn in the economy that has lasted at least 2 consecutive quarters. Usually an economy is in a recession well before the official statistics are released that prove it. In a recession, many people loose their jobs. We have seen huge job losses this year here in Australia, and abroad in places like the United States, and our respective countries are indeed in recession. When an economy enters a recession, people don’t feel as confident to spend, or they may have lost their job and they don’t have the means to spend as much as they once did.
This reduction in spending causes a vicious cycle of downturn in the economy, as about 60% of the economy is made up of consumer spending. As an individual it is arguably more important to save money and reduce spending when faced with a job loss or an economic downturn, but for the economy this is painful. If people don’t spend in shops, then there wont be work for people in retail. If people stop buying goods, then there wont be demand for goods, and this can lead to further job losses all the way down the supply chain.
So what can you do as an individual in these times? My best advice is to first make sure your finances are in order. Step 1: Pay down your debt and don’t acquire additional debt you don’t need. Step 2: Make sure you have a good financial safety net in savings in cash to cover any emergency expenses that come up. Step 3: Save for purchases rather than borrowing, and enjoy spending some of your own money. Step 4: Insure what you love.
Step 1: Pay down your debt
It’s a recession — it is a bad idea to borrow money because we don’t know what is going to happen. No-one has a crystal ball and we cant see into the future to know how long these times will endure. The last thing anyone should be doing is taking on bad debt in a recession. So what is bad debt? Bad debt is taking out debt for things that give you no return and that you will have to pay back whether or not you can afford it. Bad debt is credit card loans, payday loans, loans on platforms such as AfterPay, ZipPay and similar, housing loans, new car loans, margin lending loans and similar.
A recession is not the time to take on additional debt. What happens if you loose your job? How will you service the loan? It’s so easy to rack up huge debts on credit cards or payment deferring platforms, but it is not financially savvy. What might have once been easy to pay off recurring debts when you were fully employed can become painful or even impossible once underemployed or unemployed. It is much better to save for the things you want.
If you do already have credit debt, try to pay it off as fast as you can manage. Be very wary of seemingly cheap balance transfer credit cards, because often the interest rate reverts back to a much higher rate after a set period. If you need a balance transfer because your credit card interest rate is unacceptably high, look for a card with an ongoing low rate and a low or zero annual fee, which means you will have predictable repayments and no shocks. Some examples of no annual fee, ‘low rate’ cards with their base interest rates quoted at time of writing this article in brackets, are the ING Orange One card (11.99% p.a. on purchases, 9.99% p.a. on installments), Heritage Gold Low Rate Credit Card (10.80% p.a.), or ME bank Low rate credit card (11.99% p.a.). Note these are base interest rates, and are often compounded daily by the bank. My advice is don’t take on extra debt with the card. Once your balance is paid off and you have a cash safety net saved up close your credit card account and chop up your credit card(s).
You shouldn’t need a credit card or payment deferring platform to live happily.
So bad debt is a thing, is there a such thing as good debt? Good debt can probably be reduced to education loans, such as HECS in Australia, and reasonably priced housing loans for somewhere to live in retirement — but only if you can afford to make the ongoing repayments. You can further your education, improve your mind, keep occupied, and you don’t have to pay them back until you are earning over a certain amount, currently about $46,000 each year. My advice is if you are considering higher education, really think hard about what are your best skills, what do you enjoy doing, what were your favourite subjects in school, how you picture yourself in the future, what job or industry you want to work in (if you know), and how you can get there through education (if education is the answer to that question). If you are not sure, it might be good to take some time off to really think about what you want before you spend any money. Perhaps take a few free courses and see what you enjoy before enrolling into an expensive university degree.
There are lots of freely available online degrees put out by top universities. They are called Massive Open Online Courses or MOOCs, and many of the worlds top institutions give out free or very cheap materials online, so that wherever you are in the world, and whatever your financial position, you can access great courses and education.
Universities like MIT, Yale and Stanford as well as many others, offer these cheap or free courses. A simple internet search for MOOC and the type of course you are interested in, say, Bachelor of Finance, should bring up a range of options. It’s true some employers wont recognize these free courses, but many employers are beginning to accept them, because they acknowledge that not everyone can afford an ‘Ivy League’ or ‘Group of 8’ education. Some businesses offer a structured platform for these courses on a paid subscription, such as Coursera.com. I have trialed an introductory Russian course from Saint Petersburg State University on Coursera.com and I have to say I enjoyed it and the modules were well designed. I do prefer the free courses though put out by places like MIT, I think they are much more accessible. I also think it is wise to be a little weary when signing up for subscriptions. Look for things like early exit fees.
Step 2: Create a financial Safety Net
‘We don’t want to be dependent on the kindness [of strangers or] of friends even… There are times when money almost stops…’ — Investor Warren Buffet, speaking at the Berkshire Hathaway 2020 AGM, paraphrasing Blanche DuBois in A Street Car Named Desire.
In times like we are seeing, in financial crises, in deep recessions — for example Greece during the GFC, in times like the Great Depression, or during times of war — money just stops. It’s not possible to get a line of credit because banks do not want to loan out money, or cannot loan out money. It becomes impossible for normal people, and even large businesses to borrow money. For many people, it doesn’t need to be one of these crises times for it to be difficult to obtain credit, for many people, such as those on low incomes or unemployment benefits, not having access to credit is just a daily reality. It is important to try to save some kind of cash safety net for yourself for emergencies, so you won’t need to rely on the kindness of others. An extreme example of what can go wrong when you have no safety net (and no social security in France in 1815), is the character Fantine in Victor Hugo’s Les Misérables, who sold her teeth and hair to pay strangers to care for her child.
If you don’t have a safety net, it is a good idea to start saving for one now, even if you just start with $1 in a dedicated zero fee bank account, preferably with a good interest rate, and always in a bank you trust. Set a goal for how much you need in your safety net. This might be the money you need for a rental-bond, or a new fridge or washing machine.
It is good to start with a goal that is attainable, so if you currently have no savings, setting a goal like $1000 is a good place to start. Putting a little away each week, for example $20, and making a rule for yourself that the money in that account money is only used in the case of a real emergency, will help motivate you to save your safety net and not spend it.
Start to think about how much cash you might need in an emergency if you didn’t have access to credit. Set a goal to save a safety net in cash of that much. For me, it is at a minimum the excess on my insurance policies and the cost of a bond for a new rental apartment.
An easy way to boost your savings is to immediately add any bonuses you might receive, for example a one off stimulus payment or a bonus from work. The best way to save however, is putting a little aside each time you are paid and then not touching that saved money.
Zero fee bank accounts I can recommend are ING Bank Savings Maximiser, which has a current variable interest rate of 1.80% p.a. — if you can afford to open a transaction account with ING that you deposit at least $1000 into a month. Or the Suncorp Bank eOptions Savings Account or Everyday Options Account which allow you to access what Suncorp calls a ‘flexi rate’ which is like a no-minimum term deposit, currently the 12 months term is 0.95% p.a. I do think at times like these, when interest rates are falling it is good to ‘lock in’ an interest rate you can rely on, so I do lean towards the Suncorp accounts for that reason.
Step 3: Save for purchases
If you are in a good financial position and have your safety net sorted out then it is possible to start also setting a little aside for purchases if you can afford it. This will bring a bit of happiness, since being able to occasionally have a coffee or meal out with friends is a lovely thing. Occasionally buying yourself a special treat with money you saved yourself can also bring a lot of satisfaction. Also knowing that even by spending a little here and there on these little luxuries or buying a coffee from a cafe you like, you are helping the economy and helping keep others in jobs. It’s good to spend a little, but only so long as it is not placing yourself into potential financial hardship.
It’s a good time to take a look at your spending and see if there is room for savings. If you have time have a look at your transaction history for the past 3 months, and try to categorize your spending into different areas, such as rent, bills, groceries, health, school, and entertainment. Is there any unnecessary spending that can be reduced? Can you switch to a cheaper electricity or gas provider, or a cheaper phone and internet plan to save you money? Can you substitute some purchases of groceries for lower cost items of the same product? For example switching from brand names to ‘no-name’ or generic brand items, like Black and Gold or Homebrand in Australia. Can you afford to start buying in bulk to save money at the grocery store? Trimming a few dollars here and there can really make a difference. My main transaction account is with ING Bank, and they recently introduced something called ‘everyday roundup’ which transfers the difference between any card purchases you make and the nearest dollar to a linked ING savings account. You can choose this automatic saving to round up to the nearest dollar or $5, depending on what is more suitable for you. This way every time you spend, you save a few dollars or cents.
Another good way to save is to set up an automatic savings transfer that will transfer money from your transaction account, say on the day you are paid or the day after. Just be sure before setting this up there is money in your account and there are no ‘dishonour fees’ if there are insufficient funds in your account. I remember being charged $35 by a bank years ago for a dishonour fee, and I was only $20 overdrawn, completely ridiculous. Most banks in Australia have been forced to get rid of unfair fees such as this after the Banking Royal Commission, but be aware there are still plenty of fees around.
Step 4: Insure what you love
If you have set up a bit of a safety net for yourself, it might be a good idea to also think about insurance and your superannuation [in the US I think this is called 401(k)]. Check your super balance and see how it is going. For information about how to check your super in Australia click here to visit the ATO website info page on super. If you have more than one super account, decide which one is best and transfer your balances from your other funds to that one, and close off those unwanted accounts. When deciding which fund is best, look at their fees (lower is better), insurance (more cover is better), and returns (higher return on the ‘same’ balanced portfolio product is generally better). When you get a new job, make sure to give your new employer your superannuation fund details, so they don’t just make you an new account in their default fund. This process is called consolidation. It reduces your fees and means you will in the long run get higher returns on your super, which is what you want because it is your savings for retirement and it is really important. If you have a lower balance it can be eaten away by fees. The minimum amount a super account can have before it is transferred to a low fee government super holding account is about $100, so you could potentially loose hundreds of dollars or more if you don’t act on it early. I think from 2019 on-wards if there is period of inactivity in a super account, the super balance needs to be transferred by the super fund to a holding account for the individual at the ATO. This was designed to reduce losses to individuals caused by inactive accounts accruing fees.
Decide if you can start making a fortnightly payment to your super, even if it is only $10. This will make sure your superannuation account stays open even if you loose your job and your employer no longer pays contributions. It is important, because for many people super is how we are also insured in case of terminal illness or permanent disability. If you are on a low income in Australia and meet the eligibility criteria, the government will make a co-contribution of up to $500 each year if you make voluntary contributions to your super account. That is even more motivation to save, because it’s a huge free boost for your super savings.
If you stop paying your contributions into your super, and your account is closed, for example due to a low balance (because fees are often still deducted even if you don’t make contributions), you won’t be covered by that insurance anymore. I admit, a lot of super insurance policies are not the best, but some insurance is often better than no insurance. We never really know when we might be struck down by some terrible event, so it is much better to be covered by a life insurance policy, and superannuation often offers very affordable policies compared to what else is available.
Outside of super, you can have a look at things like home and contents insurance. If you lost everything, could you afford to replace or rebuild from your savings? For most people the answer to that question is no, definitely not. Even if you are only renting it is a good idea to have contents insurance to cover your possessions, especially if you are well established or have children. It’s a good idea to shop around for home and contents insurance policies, until you find one that suits you best. Some are very low cost, for example ING Bank contents insurance for tenants, which is around $25 a month for cover of up to $120,000 in contents (with $500 excess), but they don’t have the more extensive of the cover of other policies. The ING insurance is basically a no-frills insurance, which is actually really good value for renters, because typically you are not going to need things like ‘motor-burnout’, but you might want to think twice about it because it doesn’t include pretty standard things like ‘flood cover’. Personally I went for a more expensive policy that also gives me more extensive cover and optional cover on items like my laptop and other valuables away from home (which you can also get with ING), and up to 10% of my insurance cover for temporary accommodation for up to a year should something happen to my home that makes it unlivable. ING Bank does also offer 10% of total insured as temporary accommodation. The insurer only pays the difference between your regular rental payments and the cost of your temporary accommodation. I think this is quite standard across insurers covering temporary accommodation, they only cover ‘costs actually incurred’. ING Bank contents insurance also pays for storage of ‘some’ items while you are in temporary accommodation.
This type of temporary accommodation policy under a home or contents insurance policy is also available from insurers such as St. George Bank and Suncorp Bank for around $50 a month for $120,000 of cover (and $2000 excess). The policies differ slightly and have different levels of excess. Often you can reduce your monthly or annual premium by increasing your excess, just make sure the excess is an amount you have in cash easily covered in your safety net account, as you will have to pay the excess before the insurer pays a dime. You will also need to start keeping itemised receipts for every purchase you make. It is a good idea to keep an electronic copy of these receipts, saved to ‘the cloud’, in case your home is destroyed, your receipts will be saved.
It is a great peace of mind to know that if my house burns down, my child will have a roof over his head and I will have most, if not all, of any additional rent paid in temporary accommodation for a year by my insurer.
I guess my advice is it is good to think about possible scenarios that life might throw at you, think about the future and prepare for it. Once you are prepared, it’s a huge weight off your shoulders to feel financially more secure and safer in the event of some undesirable outcomes. Then you can go out and enjoy the world, worry a little less, and enjoy the little pleasures in life.
Please read this blog knowing that the advice I give is general in nature. I don’t know your individual financial circumstances, and this advice might not be suitable for you. If you are going to make any big financial decisions consider taking financial advice from an independent financial advisor.
Disclosure: I only recommend products that I either use or would consider purchasing for myself or a loved one. I currently am a customer of Suncorp bank, St. George Bank, and ING Bank Australia. I own shares in Suncorp Bank.