Is an Australian recession coming? If you’ve glanced at the news more than once in the last year, you’ve probably heard talk about an upcoming recession in 2023, especially in the US.
What is a recession?
A recession basically means that, just like Owen’s hairline, things in the economy are going backwards when they should be going forwards. The retraction also has to happen for an extended period of time before it’s considered a recession…think Ed Sheeran’s Mathematics Tour, which started in April 2022 and won’t end until September 2023. Unlike Ed’s tour, we don’t exactly know exactly when a recession will start and finish, but it needs to happen for at least 6 months before it’s official (although the specific number is up for debate).
Recessions are typically associated with pain for a regular person like you and me because when the economy is struggling, spending slows down, the unemployment rate increases (because sadly some companies have to make redundancies) and we can feel less confident using our money to invest and take risks. Overall, it’s not too great.
But regardless of your views on whether or not a recession is on its way (a panel of 29 leading Australian economists are leaning towards no recession for Australia this year), there’s plenty you can do to build your own personal moat, and fend off any financial challenges that could come your way.
When the hard stuff comes knocking at your door, you’ll realise just how much preparation comes in handy.
6 ways to recession-proof your finances
🎧 Prefer audio? We got you. Kate & Owen recently discussed this on The Australian Finance Podcast.
1. Know what your “ramen number” is
Owen introduced me to this idea years ago. Your ramen number is the cost of your bare basic expenses. Cut out the new clothes, coffee and travel, add up your rent, basic groceries and insurances, and work out what it costs you to survive each month. Imagine all you could afford is cheap ramen noodles.
If something happens to your main income source, you’ll quickly be able to figure out how long your savings will last and the minimum amount you’ll need to earn each month.
2. Sort out your emergency runway
I will talk about this until I’m the last person on earth, but it’s critical you have some cash (typically 3-6 months’ worth) stashed away in a high-interest savings account, which you can use when everything goes wrong — without having to go into debt.
Open an account.
Label it. “Emergency fund”.
Decide how much you want in there.
Then find money in your monthly budget and transfer it into your emergency fund every month.
Repeat until done.
3. Focus on paying off BNPL and high-interest debts like credit cards
This is a good idea for anyone serious about supercharging their financial future. When things start getting expensive (have you seen the cost of coffee lately?!) you don’t want a big chunk of your income going towards feeding a growing pile of debt.
If you’re looking for strategies to get cracking on your debt, speak to a financial counsellor (it’s free and confidential) and check out our Getting and Staying Out of Debt course (which is also free).
4. Stop investing money you’re going to need in the next few years
In a recession, the economy slows down, which directly affects businesses. This in turn means that the share market can be a bit more volatile than normal, so it’s a good reminder you shouldn’t be investing money you need in the next few years (yes, that includes your emergency fund).
Our investment philosophy at Rask is to buy companies and ETFs with a long-term view, which you can learn more about in our Get Rich Slow course.
5. Diversify your income sources
Many of us have one main income source, our 9-to-5, and potentially a little bit of bank interest. Think about some ways to earn a bit of extra income this year. Side hustles can help for a short while.
When we asked our community members how they’ve earned a bit of extra cash, responses included assembling IKEA furniture via Airtasker, house (and pet) sitting, renting out spare things (like a room, a trailer or a car), personal training, delivering food, tutoring, gardening, mounting TVs and selling digital resources.
6. Start investing in your career and making yourself invaluable to your team
Finally, make sure you’re giving your career the attention it deserves. Dust that CV off, update your LinkedIn profile, see if there are any areas you can upskill this year and figure out what problems you can help solve in your company. Then start creating a file of the things you did well, so you can show off to your boss.
Remember, some companies could be struggling in 2023 — so be sure to be mindful of what’s realistic and what’s not. At the very least, becoming more important and improving your skillset can’t hurt?
✅ Be ready
Whatever happens in the economy, good, bad or ugly, they’re outside of your control. But there are plenty of things you can do now to make sure your finances are ready to face any challenges this year, so pick one thing on this list and start making an action plan to work towards it.
