How to recession-proof your finances

BOITUMELO NTSOKO: The World Bank recently warned in a study that, as central banks across the world spontaneously hike interest rates in response to inflation, the world may be edging toward a recession in 2023, and a string of financial crises in emerging markets and developing economies that would wreak havoc on the global economy.

If we were to enter a global recession, do you know what impact it would have on your finances and are you adequately prepared for this?

In this episode I’m joined by Chrisley Botha, who is a certified financial planner at PSG Wealth, Western Cape. She will walk us through the steps to take to prepare for a recession and give us an idea on the best investment strategy during this period. Welcome, Chrisley.

CHRISLEY BOTHA: Hi, Tumi. Thank you so much. I’m excited to be here today.

BOITUMELO NTSOKO: Do you agree with the World Bank’s global recession prediction for 2023?

CHRISLEY BOTHA: Tumi, I would say that we aren’t really edging towards a global recession in 2023 – I would actually say that we are already in the midst of one right now. The global economy is now at its steepest slowdown following a post-recession recovery since the 1970s.

Economists define a recession as two consecutive quarters of negative GDP growth, and is what we have been seeing.

The World Bank predicts in its study that it will see an increase in unemployment, a drop in GDP growth, and an increase in debt defaults as more people lose their jobs and businesses go under due to decreased consumer spending.

So I think the global economy is dangerously close to – if not already in – a recession. As inflation levels remain elevated, interest rates rise and a growing debt burden hits the developing world. I mean, the world’s three largest economies, the US, China, and the euro area have all been slowing sharply, and even just a moderate hit to the global economy may over the next year tip us all into a recession.

BOITUMELO NTSOKO: And how would a global recession affect us here in South Africa?

CHRISLEY BOTHA: Tumi, a global recession will affect South Africa the same way it affects every other country in the world. That is, by making everything more expensive. If what I just mentioned transpires, South Africa’s economy can hardly escape a recession, given its many self-inflicted wounds.

Global growth is slowing sharply, with further slowing likely as more countries fall into a recession.

My deep concern is that these streams will persist with long-lasting consequences that are devastating for people in emerging markets and developing countries like South Africa.

A global recession would affect South Africa in a number of ways. Firstly, there will be a drop in demand for natural resources such as gold and platinum. This means that the country’s mining industry will definitely be affected, which would result in a decrease in foreign currency reserves. Because the country relies on exporting these minerals to make money, it could cause a financial crisis within the country.

And secondly, there’s a likelihood of an increase in unemployment rates due to a decrease in demand for goods and services – domestically as well as internationally. This means that more people will have less money to spend on things like groceries, clothing, or even housing since [there will be] fewer jobs available as these people lose their jobs and become homeless or unable to pay their rent or mortgages. And we’ve seen this happening at an alarming rate already.

And then lastly, I think South African imports [comprise] about 30% of its food from abroad every year. [South Africa] also imports about 40% of its energy needs, which means that it’s an incredibly important dependent country. And when a recession hits, demand for those resources drops, as people stop buying them as much.

In turn, supply drops as companies cut back on production and shipping – and that all goes up due to fewer ships being able to transport goods around the world. It means that prices go up abroad, including food and energy exports to South Africa.

So I think there will definitely be a significant impact on South Africa when we reach a global recession.

BOITUMELO NTSOKO: So how then does one prepare for this situation?

CHRISLEY BOTHA: Tumi, I think a lot of people are currently feeling uneasy about the economy, and I think the most important step that you can take is to familiarise yourself with your monthly budget. Obviously, being financial advisors, this is what we deal with daily, and we get this question a lot from our clients because everyone is facing uncertainty and fear.

I would say in an emergency you want your income to last as long as possible.

So, having an idea of how much money is floating out of your pockets and where it’s going can help you identify the best course of action for planning how you’d handle unemployment or any other emergency.

The five rules that I normally explain to my clients when we have this discussion [include], first of all, to try and bulk up your emergency savings. In a recession, having an adequate emergency fund of about nine to 12 months of your salary can really save you a lot of stress.

Secondly, learn to budget and live within your means. Once you get an idea of how much money you’re spending, try to find the areas where you can cut back. Most of the time those are non-essential purchases.

Then I think it’s very important to remember to pay off your debt. The last thing you want to do is to worry about having to pay off debt in a bad economy, especially with the increased rates of unemployment.

Then I think it’s very important, if not the most important point, remember to stay invested. Recent market volatility may have us all considering cutting back on our savings or getting out of the market. However, it’s important to keep your emotions in check and remember that you’re in it for the long term.

You never want to make an investment decision when you panic or when you are really afraid; you have to try to step back from that to make a reasonable decision. So, make sure your portfolio is well diversified to withstand the current market volatility.

And then I think it’s also important to just consider your career opportunities, both now and in the future.

Recessions often result in high levels of unemployment, so it’s important to consider how tough economic times could affect your career, and you should have a backup plan should you face retrenchment. Also try to maybe generate multiple streams of income, like [developing] a side hustle, or consider some passive income opportunities in some recession-proof kind of industries.

BOITUMELO NTSOKO: Chrisley, just bearing on investments, in a recessionary environment should investors consider moving all or part of their funds to more conservative investments?

CHRISLEY BOTHA: In a recessionary environment I think it’s important to consider the risks of moving funds to a more conservative investment. It’s also important to remember that the best financial strategy is to diversify. So, firstly, it’s important to remember that all investment strategies carry some level of risk and shares are no different. Even if you’re looking at low-risk options or more conservative options like bonds, there’s always a chance that your investment will pay off poorly or even fail completely.

And then, secondly, it’s important to remember that while shares might seem risky at times they have historically outperformed other types of investments over time. In fact, the study shows that over the past 70 years or so, the stock market has produced higher returns than any other type of investment strategy. So this is still why many people choose shares as their primary way to grow their money over time.

Just remember you don’t want to put all your eggs in one basket, and you need to have some money in safe investments like bonds, as well as high-equity shares.

Having a diversified portfolio, I think, will help you protect yourself against market volatility, while also giving you a chance to still leverage off some of the good opportunities that may arise during a bear market.

BOITUMELO NTSOKO: Earlier on you mentioned the importance of paying down your debt. What is the most effective debt-management strategy during this period?

CHRISLEY BOTHA: Tumi, the most important and I think the most effective debt-management strategy during a recession is to pay off the debts that have the highest interest rates first. This way you can save money on interest payments and move on to paying other debts more quickly.

Not only will it help you be prepared for [possibly] losing your job, but rates are also expected to move higher in response to rate hikes. So I would just try to prioritise paying off debt with the highest interest rate first, and also try not to accumulate more debt when things are starting to get a little bit tougher.

BOITUMELO NTSOKO: And then for those who are in debt review would the strategy be the same?

CHRISLEY BOTHA: If you’re in debt review, Tumi, I think it’s important to, as I mentioned earlier, look at your budget. What are you getting in and what are you actually paying out? It’s important to see where your money is flowing out.

If you do a full monthly budget, there are sometimes a lot of opportunities where you can eliminate expenses on non-essential purchases. So to people who are in debt review I would definitely say that they should focus on paying their high-interest debt first, and try to get that paid up as soon as possible.

BOITUMELO NTSOKO: You also mentioned the importance of recession-proofing your career. How can one go about doing this?

CHRISLEY BOTHA: I think during a recession people have to prepare for less overall job security. The unemployment rate for those with batchelor’s degrees or higher is much lower than for those who have a high school education or less. So I think to recession-proof your career [is] one of the best investments you can make is pursuing an education.

So try and update your CV. Be sure to consider opportunities – not only in your industry, but also any other connections that you have outside of your current employer.

You should also consider, as I mentioned, additional income streams, not only because you may be uncertain of your current job. But also look for opportunities in areas that are a bit more stable and secure during a recession.

I think you’ve probably heard this, but the average millionaire has about seven sources of income, and creating multiple streams of income ensures that you increase how much you have coming in versus how much is going out.

So try sorting a side hustle, update your CV, educate yourself, and consider something that you are passionate about – and try turning that into an additional income stream.

BOITUMELO NTSOKO: Thank you so much, Chrisley, for all your insights. That was Chrisley Botha, who is a certified financial planner at PSG Wealth, Western Cape.