“Recession ahead” on a road sign warning

How will a recession affect your financial plans?

If all the news coverage about a looming recession have you worried about your finances, you aren’t alone.

In fact, according to a recent survey from Empower and Personal Capital, 74% of US consumers are concerned about a recession. Meanwhile, 85% are worried about inflation and 56% say they are already seeing a decline in their standard of living.

Even if you’ve experienced a recession before, it’s unlikely to make you feel any better about the effect one may have on both your personal finances and those of the wider economy.

While economic downturns are a normal part of the cycle, it pays to be prepared for when one occurs. Read on to find out how a recession might affect your financial plans and what steps you should take to protect your personal finances.

8 ways to recession-proof your finances

  1. Review your financial plan

Every financial plan should be reviewed on a regular basis. While a plan is designed for life, it never remains static and needs to be flexible in order to react to threats and profit from opportunities.

You should expect to meet with your financial planner at least once a year. If you haven’t seen your planner recently, now may be a good time to get in touch and check that your plan is aligned according to your current circumstances, and those of the wider economy.

  1. Make sure you have an up-to-date cashflow forecast

Cashflow forecasts are an invaluable way to help you visualise how the “what ifs” you control and the “what ifs” you have no influence over – such as a recession, inflation, and higher interest rates – might affect your financial situation.

The beauty of this is that it allows you to glimpse your financial future. By removing the guesswork, you can get a more concrete idea of where the pitfalls may lie and be ready to respond accordingly by taking appropriate action.

Read more: How to see into your financial future

Your BMP Wealth planner will revisit your cashflow forecast at regular intervals and model different scenarios to help give you confidence that you’re on track to achieve your financial goals. If you’d like to review your forecast, please get in touch.

  1. Top up your emergency fund

Generally, we advise having enough savings to cover around three to six months of living costs. Depending on your circumstances, in this particularly tricky environment, it may be wise to consider increasing this float.

That said, keeping too much cash in the bank is unwise and holding too much cash could do substantial harm to your long-term financial health.

This is because cash delivers exceptionally poor returns when compared to investing your money in equities, especially in times of high inflation that we are currently experiencing.

  1. Reduce expensive debts

One costly outgoing for many people is high-interest debt payments. If you have high levels of debt and some savings, reducing or eliminating the amount you owe could help free up money to be deployed elsewhere.

High-interest debt is most commonly tied to credit card debt. If you’re carrying a long-standing balance from month to month it could be costing you hundreds, if not thousands, more each month.

One particularly alarming US poll, from Bankrate, found that 22% of Americans have more credit card debt than savings.

The less debt you have, the more you will be able to put away, or use as a cushion over the next difficult few months.

  1. Reconsider your retirement plans

Since most pension plans invest heavily in the stock market, a recession will have some effect on your retirement savings.

Whenever stock markets fall, your pensions – and other investment products you have – will inevitably reduce in value.

The good news is that history has shown that these falls aren’t permanent – when the economy recovers the value of your pensions will too. And some equities may do well in inflationary times, especially those that can preserve decent dividends or can benefit from interest rises such as some banks and other lenders.

The effect of a recession on your retirement will depend on where you are on your savings journey.

Still in the early stages of your savings journey, and still saving towards retirement? If so, stock market falls can prove beneficial. This is because your contributions enable you to buy shares at a cheaper price.

If you are close to retiring or drawing income from your pension fund, things may be trickier to navigate, and poor stock market performance can be harmful.

You may find that it is necessary to continue working for longer than you expected while you wait for stock markets to recover. Alternatively, you may have to retire on a lower income than you had anticipated.

Again, financial forecasting can help you understand the true picture of what a recession might mean for you now, and into the future.

  1. Be ready to profit from property, if prices fall

Limited supply and strong demand have been propping up house prices. In the UK especially, ever since the onset of the pandemic, the market defied the odds by not only surviving but thriving.

Places like Hong Kong can also see impressive returns of property investments.

However, increasing pressure on household finances could cause growth to slow.

A dip in the number of UK mortgage approvals in June may be the first tentative sign of a slowdown.

Although this is yet to be reflected in house prices, with rising interest rates increasing the cost of mortgage payments, together with energy price hikes and food costs increasing across the board, more people are likely to start feeling the pinch and something will have to give.

If you have cash on hand, you may find that the next 12 months could prove to be a good time to expand – or start – your property portfolio.

Read more: Hong Kong vs UK property prices: What will your money buy you?

  1. Remember you’re investing for the long term

You should always invest with a long-term view. Ideally, we recommend that you remain invested for a minimum of five years, although upwards of 10 is preferable.

This long-term approach allows your portfolio time to recover from any short-term shocks. Plus, of course, the longer you’re invested, the more your wealth will benefit from the positive effects of compound growth.

  1. Ensure your portfolio is well-diversified and flexible

Ensure your portfolio is flexible enough to cope with the effects of a recession.

In these difficult times, depending on where we are in the recessionary cycle, it’s generally wise to move away from high growth companies to being overweight in value stocks paying high dividends. Commodities, such as energy, utilities, food, and industrial metals such as copper, lithium, or aluminium can be a good choice.

While holding a well-diversified portfolio can’t guarantee protection from losses, it can help lower your risk. This is because the values of different types of assets don’t always behave the same way or move in the same direction.

By holding a diversified portfolio, a fall in the price of one investment will have less effect overall.

It’s important to invest in assets that match your appetite for risk and keep your long-term goals in mind. We will help you understand the different types of risk and explore both how comfortable you are with risk and your capacity to tolerate it.

Get in touch

At BMP Wealth we specialise in building, managing, and preserving the wealth of Hong Kong’s international community. By creating a personalised, comprehensive financial plan, we can help you realise and achieve your greater goals in life.

If you would like to discuss the current state of the economy or simply want some reassurance that you are on track to meet your long-term goals, we can help. Email info@bmpwealth.com or call +852 3975 2878.

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