Couple of days back, my 10 year old son used the word
‘Recession’. When I asked him if he understands the meaning, he confidently
explained ‘We know it is recession, when people start losing their jobs’!
Hearing this from a Vth grader was my moment of realization!
It made me realize that the word ‘recession’ is no longer confined to the books
on Economics or business news papers. In fact, in past few years this word has
appeared and been used so often in our lives that even kids can explain it. No
part of the world, be it Asia, Europe or America, seems to have remained
untouched from the effects of ‘Recession’.
So, what is recession?
What is Recession and what’s our role in it
as an individual?
Recession
is known by many words, like, Downturn, Slump, Slowdown or Economic decline. It
is generally identified by two or more consecutive quarters of negative GDP growth. In simple words, recession is temporary economic decline
during which trade and industrial activities are reduced. It is marked by declines in productivity and investment and high unemployment.
As an individual we have very limited role to play in the country’s
economy. Economic cycles and fluctuations are beyond an individual’s control.
We only get to face the consequences of these cycles. High unemployment means many
people ‘losing their jobs’ and thereby losing their income. It is one extreme
effect of recession and is quite capable of upsetting our lives. There by it is
important that we know if we are hit by recession? And most importantly what can
we do to safeguard ourselves against it?
Here are some indicators of recession and suggestions to
prepare for the battle against being hit by the recession.
1. When your
company stops hiring:
When HR says ‘Let’s put them on hold’ for the resumes you
were planning to hire…it means they know something you still don’t know! It may
mean Recession is here and your company is facing dwindling revenue and falling
profits. Therefore it is not interested in expansion at the moment so you must
brace up yourself for lesser than expected bonus and salary raise.
For the individuals whose house run on the salary they bring
home, bonus is very coveted. Bonus is often used to plan some big annual/one
time expenditure like vacations, down payment for a house purchase, prepayment
of loans, marriage, college fees. Getting less than expected bonus may disrupt our
entire planning. To avoid such situation, focus on Goal based Regular Savings!
If your goal is near, do not depend fully upon ‘mere
expectations’ of getting good bonus! Rather liquidate and consolidate your
prior investments and keep the cash ready.
2. When you
see lesser footfall in malls and restaurants:
Lately you see No waiting lines to get the seats in your
favorite restaurant and the amazing dress you saw last week in sale is still
there…are you wondering where are all the people gone? The reason may not be the
sudden reluctance to entertain themselves or buy new things but the reluctance
to ‘part with the money’ in the Recession hit economy.
Before you are also forced to cut down your expenditure
haphazardly it is better to categorize your discretionary and non discretionary
expenses. ‘Prepare a budget’ and ask
everyone in the family (including kids) to suggest cost cutting measures. It
will keep everyone ready for hard time called recession.
3. When your boss become
unreasonably demanding:
If your boss is suddenly asking you to take up more
responsibilities without hinting any promotion or salary raise then it may be
the time to become alert! It may mean that company is planning to squeeze more
work out of lesser number of employees ie possibility of job cuts.
Even though you are not given the pink slip yet…it will be
wise to prepare yourself for any such situation. It is advisable to ‘Create an emergency fund, buy more medical
insurance besides the one from your company, get income protection insurance
and also home loan insurance’. If you have any loan, you can increase the
tenure and keep EMIs to the minimum; this will put lesser burden on your
current finances. Also start looking for back-up job options or explore
alternative career options before even before it becomes absolutely necessary.
4. When your investments
give you negative surprises:
If you were planning to liquidate your investments and were
surprised to find out that you cannot even get back what you have invested, Do
not panic! Like others you may have hit by looming Recession among other
reasons. One big challenge of a recessionary economy is the ‘fewer buyers’ in the market. And
everyone wants to run away selling whatever is left of their investments. Hence
you may be offered less money for your investments than expected.
The fear of losing money is ‘real’ at such a time provided
you ‘really’ need to sell/ liquidate your investments. According to IMF
(International Monetary Fund), "Global recessions seem to occur over a
cycle lasting between eight and 10 years." And if you look at the data for
last 50 years it is visible that at the maximum any Recessionary period has
lasted for NOT more than 18-20 months, ie. Not even 2 years.
As an individual you need to understand these economic cycles
before taking any hasty decision, particularly if you have NO immediate need of money and were originally planning to stay
invested for 5-10 years. Hence ‘It
is important to evaluate if you really need to liquidate your investments’?
In case you are doing it because everyone else is doing it then it may be the time
to recheck the fundamentals on which you initially invested your money. If
there is no real need then perhaps you can bear this notional loss since almost
always the economy goes back into the recovery mode.
Also while investing, instead of ‘waiting to get the best
returns’ on your investment, you should pre-decide on how much money you need
for your goals. This will help you calculate returns you should get from your
investments. It is advisable to keep
consolidating your investments whenever you reach the desired amount. Rest is
the Bonus!!
Finally:
The needs
and aspirations of your family are defined, derived and fulfilled by not only
what do you earn but also by how much do you save and how do you spend it. You
may love to plan about how to “earn’ more money but it is equally desirable to
plan about ‘how to nurture and use this money’. And in recent times it also depends
on ‘how you keep your home recession proof’!
