An Elaborative Guide

Major things you should avoid during this recession to safeguard your financial

Detailed information on the activities to avoid and to safeguard yourself financially

Alert for the readers: This is not a quick-bite article.

Now, I don’t want to put the details about the definition of ‘recession’ and how it works. The time is different and so should be our approach to tackle the recession.

You would be finding articles about what you should incorporate into your daily plans and what to be considered important for your financials during this recession time. History might be a good read for now, as we had faced severe and several recessions in the past.

My article is about the things you should avoid during the time of recession, as we often forget to list down the things we should not do. This ‘avoid list’ should guide you what not to do to put yourself into the riskier zone during this time.

Let’s take a cup of coffee or tea and sip it till the end of the list.

1. Not having your risk-assessment and not understanding your risk tolerance.

Think like a business. Every business should have a backup plan and also their S.W.O.T. analysis, which takes into consideration the risk-assessment and risk-tolerance level.

As an individual and part of your family, you have to think like a business. Having no risk-assessment of your current condition (job, personal business, health, family living, overall income, etc.) and no risk-tolerance judgment (debt-equity ratio, loans, family expenses, job-cut exposure, impact on the overall income and living, etc.), you will be putting yourself in the riskier zone, to be impacted immediately if anything goes wrong.

So, uncover the risk-assessment of your family level income, identify the income sources and risk-levels of those sources. Determine the level of tolerance, the sources to be impacted, and formulate a back-up fund plan/capital accumulation plan, if required immediate money.

2. Maintaining an extravagant Lifestyle.

The ‘extravagant lifestyle’ here means — all the lavishness and unnecessary expenses you are incurring, which might not be part of basic and necessary human needs.

Having food is necessary, but having foods from a shiny cuisine or special chef’s dining is not required to breathe. Having clothes are important, but buying luxury clothing and getting it delivered in your doorstep doesn’t serve any purpose, other than short-term happiness.

Again, I’m not against it at all- I did these things frequently during pre-pandemic days and will probably consider these things once the recession and pandemic are over. But for now, keep your expenses minimum and onto the basic things you need.

If you require a different cuisine, cook something other than the regular food with different ingredients. If you want to dress fancy, why don’t you bring out the old fancy clothes that you haven’t wear for a couple of months/years? Do you want to buy an audio speaker? Listen to music in your headphone or television or any available media for now.

Cutting these additional costs will help you to build your emergency fund when you need it.

3. Stimulating Additional Debt.

People want to keep money in their pockets or emergency fund and sometimes, people consider additional debt to bear the expenses for now and not to touch their currently generated income.

This is a big mistake.

It also includes spending more and more on credit card/s.

It also includes not paying the credit card debt every month or paying more for the credit card interest.

The priority for you should be minimizing or omitting the debt at all. If you take a bank loan to cover your expenses, there are two immediate downfalls for it: a) interest expense that you have to bear and b) artificial perception of having money in your emergency fund, whereas some of it will go away to pay your debt.

And consider the scenario, when you will not have the generating income (because of job cut, business closure, rental payment delays from your tenants, etc.). That time, which one you should pay — additional debt that’s being taken or your daily living? Think and decide to avoid it.

4. Becoming a Co-signer.

Vulnerability is all-around and even the mightiest can fall during this knock-down. So, please do not accept being a co-signer these days — at least for the short term.

Why? If the business or person falls under the bankruptcy or debt, you will be the other personnel, who will be liable for that and unfortunately, you will have to take a hit to pay (even if you haven’t taken part in the default). For this period, think about your financial safety.

If you decide to be a co-signer for any debt or venture, please review the financial health of the business or personnel, their contingency fund scenario, etc. before extending your hand.

5. Taking your current career for Granted.

Even on ‘normal’ time, this is a big mistake. As an individual, you have to always consider the vulnerability of the job market and business scenario.

In the ‘normal time’, if the function or role or division doesn’t deem valuable or adding any value, organizations get rid of the part to run their business smoothly. And in this recession time, most of the organizations have taken the hit of generating a low revenue stream, so this is one of their consideration to get the rid-of less productive unit or the unit that is not necessary for their immediate survival. It might sound crazy, but it’s like the unnecessary cost cut like your lavishing things I’ve mentioned earlier and I’m not comparing human lives as the lavishing item, I’m mentioning it how organizations think.

So, have a backup strategy, have alternative options of your career, and probably build secondary income sources to be on the safe side. Maximize your professional value by connecting with other professionals and businesses, keep relevant touch-points with your clients, engage in social media, share valuable insights or knowledge among the network, extend help to others within your capacity. It will certainly give you an edge and keep you on a less risky side.

6. Inaccessibility to your emergency funds.

There is a difference between assets and cash. You may have a house or gold or investments, which has monetary value. And/ or, cash (on-hand or in-banks).

Now, question is — if you require immediate money, onto which one you will look first? And which one is more liquid? — Off-course, cash.

If you are living in a high debt-equity ratio (means, whatever you earn goes to your living expense and debt payments) and without reserve cash fund, you will face more difficulty during recession time. Because house or gold or investment have monetary value, but during the recession — the value quickly diminishes and as you will be trying to liquefy the asset, the value will decline more (because there will be more supply in the market than required during this time and people will not be willing to buy at the previous monetary value the assets were holding).

I would say, not differentiating between assets and cash is another thing to avoid during this recession (and in ‘normal time’).

7. Taking additional risks with investments.

It might be debatable and will vary from person to person. For most middle and lower-income level personnel, I would say this is a thing to avoid.

It doesn’t mean, you can’t invest — but only means that, avoid unnecessary risks during this downtime and invest being a thoughtful person onto the right mixture to safeguard your capital.

An example is, investing most of your capital into a stock whose share price might go up after the recession might be a thing to assess before putting all in. Because if the situation gets worse, the stock price might go down further and you will lose monetary value, hence your capital. Plus, you might require more capital during that time due to a job-cut scenario — however, you do not have any streaming income; plus the monetary value is lower.

Think before you jump to reap the benefit, it might backfire.

8. Thinking of this recession as short term.

Another great mistake. If you have looked into previous global recessions, the recession duration was on an average, 11 months* between 1900–1950, and 11.1 months* after the 1950s. The Great Recession of 2007–09 was of 18 months.

However, the impact also needs to be considered with unemployment impact and monetary value numbers, which increased significantly — compared to the pre-1950s. In the last great recession due to the housing bubble, the unemployment went up-to 10%* and in an article, Kenneth S. Rogoff (a Harvard economist) commented, “I feel like the 2008 financial crisis was just a dry run for this”.**

So, think about the long-term, prepare yourself for the long term and make the back-up plan/contingency plan, considering the long term impact, that we are about to face in the coming days.

9. Unadaptable business. Risky ventures.

If your business nature is unadaptable, probably a tougher time for you is coming. This is a time when you require to act quickly in terms of surviving your business. If your business is having revenue pressure, do the unnecessary cost-cut or downsize your business, if your business has growth potential — adapt to the growth aspect quickly.

Do not mix the growth aspect venture with a risky venture. Investing in local grocery business might be a growth aspect; investing in a house with your emergency money is a risky venture (opinions will differ, as people have different levels of emergency funds).

Please think about your current financial aspect and consider taking your decision based on that.

10. Excessive drinking.

The time is different — for many of us, this might be once upon a lifetime disaster (or there might be a couple). So, if you want to get your peace in a bottle of Glenfiddich or Grey Goose every day, excessively, you will lose that.

Keeping your sanity in this time is important and excessive drinking will dilute your concentration.

Summary and conclusion

Here is a summary of the avoidable to keep in mind during the time of recession.

· Not having your individual risk-assessment and risk-tolerance.

· Maintaining an extravagant Lifestyle.

· Stimulating Additional Debt.

· Becoming a Co-signer.

· Taking your current career for Granted.

· Inaccessibility to your emergency funds.

· Taking additional risks with investments.

· Thinking of this recession as short term.

· Unadaptable business. Risky ventures.

· Excessive drinking.

It is natural to be panicked during this time. But do not take it to an unnatural level, where you will lose your sanity and lose your track. Evaluate your scenario, make action plans based on that, and follow the plan rigorously. If required, make some adjustments based on the scenario. Humanity has passed many great disasters.

This too shall pass.

Sources used (information links, not affiliated links)

• *Investopedia. (Article link: https://www.investopedia.com/articles/economics/08/past-recessions.asp)
• **The New York Times. (Article link: https://www.nytimes.com/2020/04/01/business/economy/coronavirus-recession.html)

Suntonu Bhadra is a 2020 joined writer in Medium, who loves to learn from surroundings and world wide web. In his newfound love- ‘Medium’, he is expressing his thoughts and is looking forward to engaging with diversified writers and readers around the world. Find Suntonu at LinkedIn and Twitter.