How to be prepared for a recession?

What are the measures you should take for your personal finance to be ready for a recession?

How to be prepared for a recession?
Make sure that you have a separate comprehensive health insurance cover for your entire family.

In the last few days, quite a few start-ups have carried out mass layoffs. If economy experts are to be believed, the world may head towards another recession very soon. We might see layoffs at an even larger scale.

In such a scenario, how can you prepare yourself to be financially secure? What are the measures you should take for your personal finance to be ready for a recession?

If you get affected due to a recession, there are two possibilities. Either you will see a pay cut, or you will lose your job temporarily. In either case, it means lesser money in hand.

As a financial planner, I have a few suggestions to be ready for such a scenario.

Firstly, make sure that you have a separate comprehensive health insurance cover for your entire family i.e. your spouse, kids as well as parents. If you lose your job, the corporate health insurance cover will also not be valid anymore. So, buy a separate health insurance coverage right away. Moreover, corporate health insurance covers are not comprehensive in most cases. The coverage amount is also very nominal typically.

If anyone in your family falls sick while you are on pay cut or out of job, will be a very difficult situation to manage if you don’t have health insurance coverage.

Secondly, you must have an emergency fund in place to take care of essential expenses for at least 6 months.

We call having an emergency fund the 0thstep of financial planning. To estimate the amount you need for an emergency, do the following:

Estimate your monthly basic expenses i.e. food, groceries, rent, other household expenses, school fees for your kids, fuel, internet, and other utilities. Let’s say your monthly basis expenses are Rs 40,000.

Then consider your loan EMIs. Let’s say your EMIs are Rs 25,000 per month.

Then consider any insurance premium you are expected to pay in the next 6 months. Let’s say you need to pay the life insurance premium of Rs 25,000 after 3 months.

So, the total money you should have in your emergency fund for 6 months will be:

Rs. 40,000 x 6 + Rs. 25,000 x 6 + Rs. 25,000 = Rs. 415,000.

Now, where should this money be parked?

I would ideally recommend keeping 1/3rdof the emergency fund in a separate savings account. A savings account is the most liquid instrument. In case of any urgent need, you should be able to withdraw some money at least.

Then, the rest of the 2/3rdportion can be parked in liquid mutual funds. Do note that if you need to tap into your liquid mutual fund, it will take 1 working day for you to get the money back into your account.

Some people also park their emergency funds in stock markets for higher returns. I strongly recommend against such practices. For an emergency fund, the priority is the protection of capital, not the growth of the capital. Emergency doesn’t come knocking at your doors. The money should not be lost when you need it. It can be in loss if you keep the money in stock markets. Especially, if a recession is expected, stock markets should be avoided for any kind of short-term needs.

Conclusion

Having health insurance and an emergency fund are two essential personal finance measures that you should take to guard yourself against recession.

(By Anmol Gupta, a financial planner, investment advisor, and founder of 7Prosper – a financial planning services company)

Disclaimer: This is the personal opinion of the author.

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