The World Bank has warned that interest rate hikes by central banks around the world could trigger a global recession in 2023. As reported by BBC, central banks have raised rates to tackle soaring prices. Raising rates makes borrowing more expensive to try to bring down the pace of price rises. But, it also makes loans more costly, thus can slow economic growth. The World Bank had said that the global economy is in its steepest slowdown since 1970, BBC reported.
Whether a recession is near, or a bit further away, here’s what you can do to prepare financially when one occurs.
1. Start an emergency fund
It’s the most common advice that most financial advisors would recommend. Bulk up your emergency fund and make sure you have enough savings to cover three to six months of living expenses. If you can’t afford to save 6 months’ worth of your salary, start small with 3 months’ salary and gradually increase it.
Let’s say, your salary is RM3,000 per month, make sure you have at least RM9,000 in your emergency savings. If you are single and not tied to any big commitment, force yourself to save 40% to 50% of your salary.
2. Generate side income
Nowadays, there’s a lot of side income you can do be it e-hailing service, food delivery service, digital creator and many more. It’s all up to you whether you want to take the initiative or not. Besides, if you lost your job due to the recession, at least you have a side income to support you until you landed a new job.
3. Avoid adding new commitments
Does your friend buy a new fancy car? Do you want to buy a new car too? Ask yourself, do you really need it? Is it necessary to buy a new car right now? Unless your car keeps breaking down, and you rely on your car to go to work, then you should buy a new one.
However, try not to spend a big chunk of money on a new car. If your salary is qualified for a car worth RM80,000, buy an RM50,000 car instead. Forget those international car brands and be moderate. Besides, try to apply for a car loan with a fixed interest rate.
4. Don’t quit your job without any backup plan
It’s not a good idea to quit just before a possible recession. Layoffs and job cuts are typical courses of action in a recession, as companies seek to downsize and reduce their costs. In such circumstances, employers may resort to so-called last in, first out policies. Therefore, you should carefully weigh the risks before making any drastic move. If you still want to resign, make sure you have a stable source of income before making any big decision.
5. Do not add more unnecessary debt
Start to look at where you can cut back on spending. If your current smartphone is still okay and functioning, thus, buying a new iPhone 14 is not necessary. You have to think about the “what ifs” to ensure you are not spending on unnecessary things.
For instance, think “what if my income goes down?” “what if my rent goes up?” If you start looking at all those what-ifs, you will find ways to reduce those expenses. It’s better to save money in an emergency fund rather than splurge it.
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