How to prepare for a recession

With some economic experts speculating that Australia could enter a mild recession by the end of 2023, it’s worth getting your finances in check ahead of time.

This year has been financially challenging for many Australians as high levels of inflation continue to push up the cost of living. The growing cost of essential expenses such as groceries, petrol and electricity bills is putting pressure on household budgets across the country.

In an effort to tackle rising inflation, the Reserve Bank of Australia (RBA) has raised the official cash rate three times since April, lifting it from 0.10% to 1.35%. The big four banks are predicting more hikes in the coming months and into next year. Of course, these rate increases have largely been passed on to mortgage holders, which in many cases has added to existing financial strain.

While RBA governor Philip Lowe said in June that he is not expecting a recession, other economic experts are predicting that a mild recession could occur sometime next year.

Preparing yourself and your family for tough financial times can put you in a better position to tackle any challenges that may come your way.

1. Assess your budget

Getting your finances in order starts with understanding where your money is going each month. A simple way to do this is to go through your latest bank statements and categorise your spending. You may find that you are spending more than you thought on items that you could realistically cut back on.

Next, set up your budget. It’s important to do this in a way that’s realistic for you. That could look like a sketched table in a notebook, an excel spreadsheet or a budgeting app on your phone. Whichever way you choose, the aim is to distribute your income into separate categories that cover all of your liabilities, daily expenses and discretionary purchases.

Don’t forget to budget for large expenses like car registration and quarterly energy bills by putting aside a certain amount each pay cycle. That way it’s there when you need it, and you won’t feel so stretched when the bills come in.

If you already have a budget that you stick to each month, it’s worth revisiting it every so often to see whether it needs to be adjusted – particularly at times when costs are rising. 

2. Pay down debts

If you have the means to prioritise paying down existing debts, you’ll not only reduce the principal amount owing, but also the total amount you’ll pay in interest charges. Some debts, like a fixed rate personal loan, may have a set payment schedule that works towards paying off the debt in full. While others, like credit cards, allow you to choose how much you pay each month, as long as you meet the minimum payment amount.

It might make sense to stick to your regular repayments for financial products like fixed rate loans, as you can sometimes be charged a fee to make extra repayments or to pay the debt off early. However, it’s worth checking the available features on your product, as some lenders allow for early repayment after a certain period of time.

When it comes to credit cards, it could take you years to pay off your debt if you’re simply repaying the minimum amount each month, as much of your repayment will go towards interest charges that continue to accrue.

According to Moneysmart’s credit card calculator, if you have $5000 owing on your credit card with a 15 per cent interest rate and only pay the minimum repayment each month, you’d pay a total of $12,030 over 23 years and 10 months – and that’s assuming you stop using it for future purchases. That means you’d be paying $7030 in interest, or $2030 more in interest charges than actual purchases made.

If you have multiple credit cards and/or other debts and are finding it difficult to stay on top of all the repayments each month, you could consider rolling them all into one debt consolidation personal loan. This could help you to better manage your debts, as you’ll just have the one repayment to meet each month. 

3. Create an emergency fund 

Once you’ve got a plan in place to tackle your liabilities, it’s time to focus on growing your emergency fund. Having an emergency fund can ease the sting of unexpected expenses such as medical bills, urgent home repairs or loss of income.

Even putting aside a small amount each pay cycle can add up over time, particularly if you have strict rules about when you can access it and what constitutes as an emergency.

If your budget is already feeling stretched and you’re finding it difficult to allocate some of your income to your emergency fund each month, think about how else you could grow your savings. You could consider selling household items or clothing that you no longer have a use for, or turning your hobby into a side hustle.

And don’t forget to keep your emergency fund in a savings account with a competitive interest rate. One that’s not attached to your everyday transaction account could be beneficial too, to keep it out of sight and out of mind.

4. Speak to your mortgage lender

Home loan rates are on the rise and many mortgage holders are already feeling the impact of increased repayments. If you have found yourself at risk of mortgage stress, consider reaching out to your lender to see if there is anything they can do for you.

Alternatively, you could speak to a mortgage broker to discuss whether refinancing your home loan could be a suitable option for you. Consider visiting RateCity’s mortgage broker hub to learn more.

5. Reach out for help

If, after implementing these strategies, you still find yourself in a state of financial strain, consider asking for help. The National Debt Helpline offers free financial counselling to help Australians get back on track with managing their finances.

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