Uncensored Money Season Three: Recession Proofing Your Finances
Melissa Browne: Ex-Accountant, Ex-Financial Advisor, Ex-Working Till I Drop, Now Serial Entrepreneur & Author, Financial Wellness Advocate, Living a Life by Design | 26/07/2022
In this episode, Mel and Lawsie explain what a recession is and then share their top tips on how to be financially resilient during a recession.
During this episode, Mel also mentions an episode of the Uncensored Money Podcast on Finding More Income.
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Mel: There's a lot of talk at the moment about recession and interest rates, as well as inflation. I mean, we've been talking about it in previous episodes to give you some clarity, but also some balance when it comes to clickbait headlines. So in this episode, we wanna talk about resilience and recessions. We wanna make sure your recession proofing your finances. But before we get into it, I wanna say that I don't want resilience to be your end game. That's because resilience is necessary. It's the thing that when times are tough, you can lean into and it's that grit. It's that determination. However, I also see it is that fingertipped gripping, I'm gonna get through this thing, which for me, that's not a place where I wanna live. So it's necessary for a season, but resilience, I don't think should be anyone's end game. We need to have resilience to get through shocks and times of uncertainty, but ultimately I believe it's about financial wellness. But if we don't have resilience, what I do know is it's difficult to weather financial storms, such as we're seeing now. So what we wanna do in this fairly short episode is just to make sure that first of all, you understand what a recession is, but also just give you our top tips for how to be financially resilient during a recession. And here's the thing, none of it's gonna be rocket science. It's all gonna be stuff you already know, hopefully and are already doing.
Mel: And hopefully that will give you the peace of mind, or it might just mean that you grab those one or two things that you're not doing to layer on. And that will give you that, huh? I'm doing alright. So Lawsie, let's start off with what is a recession? Economics 1 0 1.
Lawsie: Oh, I feel like I'd have to put in a very, very serious voice.
Mel: Yeah. Glasses and a tie and a blue suit.
Lawsie: I've lost them. No a recession in its simplest form just means that there's been a significant decline in general economic activity. So please don't be scared by the word 'economic' in that it's just that the economy in overall has just declined, slowed down and that's all the terms have been thrown around at the moment. Um, and if we wanna get really technical around it though, it's more traditional definition is that it is recognised when there has been two consecutive quarters, so two three month periods so effectively six months of decline as reflected or as we see in what's called the GDP or the Gross Domestic Product. Um, and we also look at other indicators such as unemployment, but yeah, there is a lot in that, but it's essentially just going okay, over six months, period of time that our GDP or our gross domestic product has declined. And that's why you're hearing things around that. Why you're hearing things about employment rates, all of that stuff at the moment, because of everything else that's going on.
Mel: Yeah. So recession proofing your finances is really all about making sure you're doing the basics right? We just wanna say that from the outset, as I said earlier, um, now that we understand what a recession is, it's just a slowing down. And I think people are seeing that. I think people are starting to slow they're spending, they're starting to tighten their belts, cause they're worried about rising interest rates and what's going on in the economy. They're seeing the share market have shocks. So they're responding to that, but we don't want you just to tighten your belts, pay mortgage and that's it. We want you to have a bit of a plan and we are gonna call this a six step plan.
Lawsie: Oh, a six step plan. We love little models.
Mel: So number one is to have an emergency fund. So emergency fund or a buffer or an 'oh God' account or 'oh f*ck' account or whatever you wanna call it, uh, is generally three months worth of living expenses that you keep in a separate account, that is separate to your savings or your everyday. And by living expenses, we simply mean those known every month expenses. So housing, electricity, internet, loans, food, groceries. Yeah. Kind of important
Lawsie: Not your luxury holidays, and anything
Mel: Holidays, haircuts, like all that sort of stuff. We can do that ourselves. So the idea is to have, and buffers were the sexiest things when COVID hit people realized that, oh my gosh. Cause the stats just before COVID was that such a huge percentage of the population were two paychecks away from not being able to pay their mortgage or two paychecks away from homelessness. And when COVID hit and we were waiting for the stimulus payments to be announced, that's when people panicked cause they realized that. So suddenly things like buffers when times are good, people go yeah, I'll get to that. But when times aren't, that's when things like buffers come into play and just FYI, your credit card is not your buffer. Your buffer has to be cash that can sit in your offset account. It can sit in a high-interest savings account, but call it something. So it's specific and three months worth of expenses. It might be six months for some people, but generally three months.
Lawsie: Yeah. And know that that is what it's there for and be prepared to use it if you need to. I see so many people, they work so hard and understandably to build up, to get to that buffer, of that emergency account balance that they feel comfortable with, and then suddenly the emergency hits and they go, oh no, I can't touch it. I'm like, no, that's what it's for. Like, you've gotta be prepared to dip into it and to be able to use it. And it has just been mindful that an emergency is exactly as the name suggests. And it's not just because I want a fancy holiday.
Mel: Exactly. Oh. I need an emergency flight to Europe. No
Lawsie: No, it is for those times when you, you know, have your job hours reduced or you lose your job or, you know, you need to yeah. All of those things, but just be prepared to actually use it. Cause if you're not, then you're still in the same position as when you didn't have it.
The next one probably won't come as a surprise either, but it is living within your means. And so we're not saying you have to just scrape by, but also just making sure that you are living comfortably and you're not racking up that credit card debt or dipping in unnecessarily to that emergency fund. And that your expenses are less than your income coming in. Like overall, that's what you wanna make sure that is happening. Um, yeah, just so you can make sure that you still have some spare dollars at the end of the day for whatever it else is that you wanna achieve.
Mel: And we've talked before about lifestyle creep. So that is, yes, you might be still living in your means, but as you're getting pay rises or as you're getting bonuses or commissions, your spending increases. And I know I look back to when I was in my twenties and go, oh my gosh, I could not possibly live like that.
Mel: But the truth is, uh, I know now there actually, there is a lot of stuff I could strip out tomorrow and be totally okay. But it is looking at have you allowed lifestyle creep to rob you of those future savings? To rob you of things like having a buffer account, having investing, so it's looking at living within your means, but also understanding has my spending kind of by default increased to what I think so that my wants have become my needs rather than understanding, oh, that's a want, not a need. You know, I think a flat screen TV nowadays is considered a need. Having a separate bedroom per child is considered need. Like there's so many things that I know when we were growing up, that people now presume are needs that simply are not. Two cars for a family, like so many things. And I'm not poo pooing those things if that's something that's important to you, but please don't confuse a want with a need.
Lawsie: Yeah, definitely.
Mel: Number three is to find additional income. So two episodes ago, we talked about how to find additional income and gave you lots of ways. So go back and listen to that episode if you want ideas because we talked about loads there. We're not gonna get into the minutia of that today. But there was Starling Bank research done in 2018, where they found that 71% to 90% of different messages around being frugal and being as spenders and tightening your belts and looking to vouchers and finding ways to save money. So women particularly have been conditioned to find savings, not to find more income. And I think both men and women are amazing at both. It's just that women aren't told that we can do that.
Mel: So finding additional income doesn't you might think, but why is that recession proofing my finances? So by finding additional income, you are not just at the mercy of your wage. Again, when COVID happens, happened, a lot of people in different industries found that suddenly their wages were reduced or their hours were reduced or they lost their job. And if they didn't have other additional income that they knew they could go to, then that was problematic. So I think people are wage slaves if they only have that income stream of a wage. Instead your income stream might be an asset. It might be new investment property or dividends or a business, but it could also be something as simple as renting out things that you have in your house. It could simply being smart about latent assets that you have, and we're not going to all of those now, as I said, go back and listen to that episode if that appeals to you. Looking at finding that additional income can be a great way of having that extra money during uncertain times so that you have that sleep at night factor. And so that you can build those buffers. You can still invest. You can do still do all those great things as life starts to get more expensive.
Lawsie: Definitely. Step four in our six step model is to invest for the long term. So the reason that we've got that in here is I think when we've got talks of recessions, so we've got talks of all share market crashes and rising interest rates and all those things. I think people can panic and want to either cash out if they've got shares or they've got a property and they panic and they sell which all that means that if your share prices have dropped, you are actually going backwards because you've sold them for a loss.
Mel: You've locked it in.
Lawsie: So this is about making sure that a couple of things really is don't panic. Think about you're investing for the long term and go back and look at the graphs, go back and look at things to see that, you know, we've had these kind of falls in the share market before, you know, let's go back and look at the world wars, the GFC, you name it. There has been big crashes in the share market yet over time it's continued to bounce back.
So it's just keeping that long term mindset and also not being scared to invest now as well. Um, I mean to quote a Mel-ism, think of, you know, particularly say for shares where we've seen them quite low at the moment or where they're dropping in value, or let's be honest, bouncing all over the place. When you see that they have gone down in value, think of them as being on sale, that now can be a great time to actually invest and just to keep doing what you've been doing.
So if part of your plan is you wanna invest a certain amount each month, keep doing that. You're abiding by a perfect investing principle there of dollar cost averaging about, you know, sometimes you're gonna buy shares when they're at a high, sometimes you're gonna buy them at a low and over the long term, which is again we're talking about 5, 7, 10, 20 years, however long it is that you're investing for, it's gonna all balance out in the end.
So yeah, two things there just around don't panic and sell out. Or if you are selling, make sure that you're selling for the right reason and to just to make sure that you don't just sit here and do nothing. Invest the money that you can afford to. If you've got other things going on because you know, less income or whatever because of what's happening for you or in the broader economy, that's different, but if you're still going same, then still just keep following your same beautiful plan about regularly investing and don't just freeze or just hold cash and do nothing, use this time to still continue to build your own wealth.
Mel: And there's a lot of talk when it comes to stress around fight or flight. But often we don't talk about freezing. And I think what too many people do is they freeze cause I think freezing is almost as bad as selling because if you are not contributing, if you're not keeping going with that beautiful long term plan, then you're missing out on compound interest. So socially distance. Don't look at them if you need to. But go along with that long term plan and if you need data and I'm someone that needs data. So if you'd invested $10,000 in an S&P 500 Index Fund, meaning the top 500 companies in the US. So if I'd invested 10 grand in the S&P 500 at the worst possible time during the 1990 to 91 recession, so the worst possible time, your investment would've grown to $150,000 in value.
Mel: Assuming dividends are reinvested along the way. So that's where, and that's a beautiful example of a recent recession, you've invested at the worst possible time, you'd be looking at it going, oh God, like the sky's falling. Look at my investment. If you'd left it alone, not even added anything, 150 K today. And that's the power of not touching it. That's the power of compound interest. And not trying to time the market, but time in the market, which is what we've been talking about for so long.
Next, be real about risk tolerance. So if you are someone that if the market was to drop 15%, which it has at this year, and if you knew that you will not be able to sleep, cause you will feel sick about that, be real about your risk tolerance.
So inside the My Financial Adulting Plan, uh, we talk about risk versus reward. We talk about what that means, and we put something in that financial planners use in order to determine what your risk tolerance is. But it's really important to understand if you are someone like me, who's quite an aggressive investor, I'm not gonna love it when they drop, but I'm gonna be okay. But if you are someone who knows, I would be sick. I just don't even know that I'd be able to get up to go to my job. Then you need to really be aware of what you are gonna invest in as a result. And you can jump on and do Money Smart Website if, uh, if you haven't done the course and if you wanna know in the meantime, Money Smart website will have info on different risk profiles and different risk tolerance so that you can under start to understand that for yourself, but it's really important. And it's really important to understand that can also change over time as you start to invest and you start to understand cycles and get used to investing, but just get real about it.
You know, not everyone should be trading shares. Not everyone should be borrowing to invest in shares. Not everyone should have an investment property, you know? It seems to me that people think there is this one path that we all need to tread when it comes to finances. And it actually is personal. It's figuring out who I am, what makes sense for me? What do I feel comfortable with? And then doing something about that. So risk tolerance is what will I feel comfortable with? And then it's investing for the long term, as we said in the previous point.
Lawsie: Yeah. And step six in our model of recession proofing your finances continues with that line of the last two points and that's all around diversification. To use the good old phrase of you don't want all your eggs in one basket. We wanna apply that to our investments. So, and what we mean by that is if you are gonna be investing, you don't put it all in one particular share. You don't just go, oh, I've heard about Telstra. I hear about BHP all the time as two popular shares. Don't put all your money in there because if one of those drop, then of course you're gonna feel that drop. And, you know, to your point around risk tolerance, if you're someone that has a low tolerance to risk to suddenly see your one investment that you have put all of your dollars in suddenly goes and fall, it's gonna be pretty scary. And the same thing applies for property, like, yes, you might own your own home, but your investment property shouldn't be the house next door necessarily. Because again, if your suburb falls in value, or if you bought a property in a mining town and suddenly the mine's dried up and it just becomes a ghost town, you need to be able to have that diversification in what you're investing in so that when things change, yes, you might have one particular investment go down or a type of investment go down, but generally you're not gonna see a different investment or a different share or ETF or managed fund, whatever you're doing, um, drop. So by having that diversification helps actually smooth out those peaks and troughs that you can otherwise experience and give you a little more sleep at night factor rather than seeing your net worth just all just plummet overnight.
Mel: And we saw that with tech stocks both in Australia and the US. If you had only invested in tech stocks, you would really be hurting because, and it's not to say they won't recover, but certainly they've dropped significantly. Um, the darling AfterPay absolutely plummeted as well as other by now pay later.
So it is that diversification, as you said, is so important and being aware that you can sometimes get that diversification through certain products. So for example, an index fund, or an exchange traded fund that invested in the top 300 or the top 500 in the US is giving you instant diversification across industries sectors because you're buying that massive parcel of funds without having to pick individual ones. So there's a way to diversify, there's always ways to do this without necessarily needing large amount of cash or even knowing oh my gosh, I have to pick 50 shares.
Lawsie: No, definitely
Mel: No, you can pick two or three different products and, or even one product. I know Warren Buffet said if something was to happen to him, he wants his wife to sell up and invest in the S&P 500. You know, one of the world's greatest investors has said, uh, that's how she'll achieve instant diversification without having to know about the stock market. So there are ways to do this. But it's just being smart about it.
So if you are concerned about the rising cost of living, if you are thinking, oh, this is really I'm feel like the frog in the pot, hopefully, you've looked at our six tips and you've ticked off some of them, if you haven't then make sure you write down the ones you need to do. And over the next three months, maybe it's doing an extra one every month or doing an extra one every week. You might not have your emergency fund done in a month or a week. Um, but you've started. You might have opened it and started an automation of getting there. If you hear those six and you’ve done them, and you're like, oh my gosh, I know all that then hopefully this gives you peace of mind that you've recession proved your finances. But if you are someone that like, Ugh, I haven't done it. And not only that I'm feeling overwhelmed, then make sure you sign up for the wait list for the My Financial Adulting Plan.
We open the doors in September and you will learn through that, how to have all this. You'll learn how to create that beautiful long term plan. And you'll learn about investing. You learn who you are, all of the things that we've talked about today more. So that will be in the show notes. And we'd love to welcome you into the next round in September.