Guest writer Andrei Buruiana shares his six-step recipe to protect personal finances in case of recession.

Let me start this article with the definition of recession and why this is important.

A recession is a significant, widespread, and prolonged downturn in economic activity. A more simplistic definition is that of two consecutive quarters of negative GDP growth that mean recession, although more complex formulas are also used.

Recession is important because it generates declines in economic output and employment, which in turn affect consumer demand. For example, declining consumer demand can prompt companies to lay off staff, which affects consumer spending power, and can further weaken consumer demand. And so on.

There is a quasi-consensus among analysts from major financial groups that much of the world will be in a recession sometime in 2023. For example, BlackRock predicts a recession, as it expects central banks to excessively tighten monetary policy in an attempt to curb inflation.

UBS also foresees 41% and 80% probabilities of a recession in the US and Europe, respectively.

The US, Europe, and most emerging countries are therefore expected to be in recession, with the exception of China.

Come recession or not, here are a few steps to take, in order to be prepared when it comes to personal finances.

Step 1

Take a close look at your spending habits and create a plan to increase the amount saved.

Ahead or during a recession give up shopping for expensive clothes or dining at exclusive restaurants.

If you don't have time to cook, opt for popular restaurants or pre-cooked meals.

Watch your must-see movies on streaming platforms and then take a break from your streaming subscriptions. At least for a while.

All this “freed” money should go into savings.

Ideally, the percentage going into savings, out of your salary, should be somewhere around 20%.

Step 2

Building up an emergency fund will prepare you for future expenses in the event of even a temporary loss of your main source of income (your salary at work).

The emergency fund should be the equivalent of 6 salaries. If you are a couple, then multiply the sum of your salaries by 6.

The emergency fund should be kept in liquid instruments such as savings or deposit accounts (short-term deposits of a few months’ maturities).

Ignore the fact that interest rates are low, as quick access to money is the main objective here.

Step 3

Finding a second source of income - outside your day job - will keep you extra prepared. Whether you decide to take a part-time job, start a small business (separate from your job) or become a second-hand trader (books, clothes, jewelry) through online platforms, creating extra income can be a backup plan.

Another option here could be re-skilling, in the sense of learning a new craft and a job changeover.

Step 4

If you already have an emergency fund, new savings and investment opportunities open up on top of this.

First, in anticipation of a recession, it's good to have liquid reserves (cash, but not in the sense of banknotes), such as money in your current account, to capitalize on price falls on the stock markets.

Experts recommend that 10% of savings should be in cash, precisely to take advantage of investment opportunities.

For those with a lot of cash, real estate could provide a lot of good deals in periods of recession.

The housing market has also slowed since the start of last year, although house prices have generally risen significantly over the past two years. If we go into a recession, people will have less access to cash and credit. As a result, prices might go down and turn real estate into good buying opportunities.

Step 5

If you have investments and you are a long-term investor, when you see falls on the stock markets don't panic and don't sell (at a loss).

To be well placed on the stock markets, go for as much diversification as possible: across different sectors of the economy, across different countries, and across different currencies.

N.B. Investing in shares on the stock market involves risk and should therefore be done on the basis of an appropriate risk profile, determined together with your bank or broker.

Step 6

If you save and invest monthly, with small amounts, do not interrupt your savings and investment plan, especially the investment part.

The reason for this is that in times of recession, stock or investment fund prices fall and you basically buy them cheaper.

Disclaimer: opinions are the author’s or quoted and do not represent investment/divestment advice nor advertising for a particular financial product, financial service, or financial company. Returns and performance mentioned are not a guarantee for the future.

by Andrei Buruiana, contributor

Andrei Buruiană is a seasoned professional in financial services, with 15 years of experience, having covered:

• Investment & Pension Fund Management;
• Retail Banking: Wealth Management & Private Banking, Product Management and Business Planning;
• Project Finance: EU Funds;
• Training & Consulting (currently), covering: Personal Finance, Sales and Ledership.

Andrei is also a content creator and contributor on several Romanian business & economics platforms. He has a Bachelor’s degree in International Business & Economics, from the Bucharest University of Economic Studies.

(Photo source: Tero Vesalainen | Dreamstime.com)