Today I’m going to give you 3 tips as to what I think people need to do to recession proof your finances.
Before you start thinking “oh great, I’ll implement them tomorrow and life will be all peachy”. These are long term things you need to focus on. That is why so many of us are far from rock solid in terms of our financial positions.
Good things don’t come easy so don’t blame me if you don’t like my tips.
One final thing. I’m writing this because as a Mortgage Broker I can see the people who are in trouble if a recession hits. It’s probably a larger amount than what you think it is.
Tip #1 – You’re not earning enough.
People are going to hate me. You need to earn more income. People are always too much thinking in speculative terms and think they can buy investments that aren’t actually earning anything then sell it when it goes up.
I’ve heard it all. “I’m gonna buy 5 investment properties in Melbourne and she’ll be all sweet”. Or this one, “I reckon my $3000 in crypto is gonna go up 3000000000000% and we’ll loaded”
Even if you get there. Piles of money have a funny way of disappearing fast, in a recession they disappear faster. How many people do you know that just sold their investments and are living off fat stacks?
The people retired and living well now have investments that are making them INCOME.
If you think super’s got you covered than think again.
As a nation we are buying houses later in life and paying more for them. This means we pay our debts later on in life. Which means we wait longer to start building our nest eggs. We don’t have enough time unless we want to retire at 75.
Bringing you back to the present. We’ve basically had no wage growth for five years – Australian wage growth going nowhere. Expenses keep going up – housing, health insurance, road tolls, childcare, electricity, education. It’s all going up.
If expenses are going up then guess what? It takes you longer again to pay the mortgage off. The reason we need to focus on income is we are currently going backwards.
I understand how infuriating I might sound. If it was so easy then you would just go out and earn more, right?
We all need to agree that the good times don’t roll on forever. In a world that’s focused on profit and governments that have truly lost the plot you need to take responsibility for your own financial future and recession proof your finances.
Tip #2 – The Cut and Invest Strategy
Look at where you can cut back on. If you are good enough at increasing your income you won’t need to cut down on expenses. That’s why I put income as number 1. However, the reality is you will probably need to spend some money to make some money. And to spend some money you’ll probably need to save some.
I really don’t want to go into a huge spiel about how you should turn into the world’s biggest tightwad. Instead, maybe you can frame it this way. Focus on saving money somewhere from your monthly expenses. It could be on utilities, eating out, drinking out, where ever. This money is now your investment into figuring out how to earn more income. Hence, the cut and invest strategy.
You could invest that money anywhere. Pay for a subscription to help you learn a skill, get a new qualification that will add value to your current job. Start a side hustle. There are literally thousands of things you can do.
A little note here. At some point you will probably feel like you’re throwing money away because you’re not making money straight away. Remember, investing is about the long term and you just need to keep on investing to get long term results. The alternative is speculating, that’s a bet on the promise of a better future. I don’t recommend that way.
There are people out there that will say how busy their lives are and that they couldn’t possibly do anything like that. That’s fine you’ll have plenty of time to think about it when you’re retired and broke.
Tip #3 – Protect yourself
When looking to recession proof your finances you should protect yourself. This is the one thing I see people doing wrong all the time. To plan a better future, you need to look into the future. You need to see the potential risks – and have things in place which will work around them if they happen.
A common question I ask borrowers when they are signing up for a 30 year home loan is “If you cannot work for a prolonged period of time then how will you afford food, bills and mortgage?”. Maybe your parents are super rich and if you end up sick, disabled or die then everything will be ok financially. Maybe not.
What if you’re employed in a dying industry like the car manufacturing industry of the last 10 years and a recession comes?
The best thing you can do is ask “what could go wrong and how could I prevent that?” I am big on protecting yourself because in my 13 odd years in finance I’ve seen bad things happen to good people.
If you’re going to have to figure out how to earn more for a better future then you should work to protect what you’ve already got first. That’s a good start.
Actually, you can start by figuring out what your current income is and multiplying that by how many years of work you have left. For example, if you’re 30 and plan to work till 65 and you earn $100,000 a year then your total income is $3.5M. For most of you out there your income’s your biggest asset and it’s not properly protected yet I bet you’ve got your car insured.
I must point out here that I’m not a financial advisor. If you want to properly insure yourself then you need to engage a good financial advisor. They may not like the whole diversifying your income thing because they want all your money in shares.
Insurance will cost you money. People always ask what does it cost. The question is what will it cost you if you need it and don’t have it?
One final thing on protecting yourself. Do not ignore this. I am the person that people often come to when they get in trouble because they need to borrow their way out of the problem. That’s all cool, but you need to qualify for lending. Generally, it’s a rule of when you don’t need it, they’re throwing it at you and when you do need no one will give the money.
Don’t get distracted
Moving on, the more I dig into money and how it works the more I get the feeling there are big things coming. It could be this year or it could be in ten years. Be assured that continually creating money is a road to nowhere and history proves that. When will things fall apart? That’s the hard question.
In a world where the word responsibility is used as a way to blame someone or something else, the best thing you can do is take responsibility.
This world is getting crazier and crazier. Flying cars, Mars colonies, AI, augmented reality, negative interest rates, crypto currencies and a cashless society. It’s easy to get distracted.
A passive approach to your finance’s means being poor in old age or bankrupt in a recession.
Don’t become a victim. Figure out how to make more and how to invest in yourself. At the same time cover your backside.
I hope you’ve enjoyed my post on 3 tips to recession proof your finances.
Will Bell Mortgage Broker is a mortgage and finance broker based in Melbourne specializing in residential home loans. Will is all about the average Australian understanding just enough of the broader economy to take action on your own personal economy. He is the host of the My Personal Economy Podcast.
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