How To Prepare Financially for an Economic Slowdown?

The coronavirus pandemic has made it mandatory to set money aside for a rainy day. You may have noticed salary cuts and layoffs during this time. It makes sense to start your emergency fund or increase contributions to survive a possible economic downturn.

You may find an economic slowdown having a direct or indirect impact on your finances. You can check if you have sufficient health insurance to meet emergency hospitalisation. Moreover, you could curtail lifestyle expenses and safeguard your finances in a possible economic slowdown. 

1. Build your emergency fund

You may consider building your emergency fund with at least six months worth of living expenses. It helps you survive a layoff and avoid falling into the loan trap. Moreover, you can even consider having one year’s expenses in your emergency fund during a possible economic downturn.

You can curtail unnecessary expenses such as eating out often to increase contributions to your emergency fund. If you don’t have an emergency fund, start building one right away to avoid a financial crisis. 

For instance, you could invest half of your emergency corpus in a liquid mutual fund. It is a debt fund that invests your money in fixed income securities maturing within 91 days. You may also consider having money in sweep-in FDs and savings bank accounts to survive an economic slowdown. 

2. Make your household budget

You could consider creating a household budget and sticking to it. It helps you account for every rupee earned and spent, which is crucial during an economic downturn. Creating a household budget enables you to stop swiping your credit cards to buy things you don’t need. 

A budget doesn’t mean compromising on your lifestyle. It merely shows where your money is being spent and helps you get a grip on your finances. You have a budget helping you attain the second stage of money management. It enables you to save and invest for the long term to achieve your financial goals.

3. Buy a health insurance plan

You may consider availing of health insurance to protect yourself against emergency hospitalisation expenses. Moreover, you can cover your family with a family floater plan. It helps protect your investments and avoid liquidating your emergency fund during a financial crisis. 

It would help if you always had personal health insurance rather than depend on your employer cover. It enables you to meet emergency hospitalisation during a layoff. Moreover, you can enhance your health cover with add-ons called riders. It helps if you choose appropriate riders to enhance the cover under your health insurance plan. 

4. Avoid unnecessary loans

It would help if you avoided making a personal loan and unnecessary credit card debt during an economic slowdown. These are high-interest loans, and you could land in the debt trap if you struggle with your repayments. Moreover, you may also postpone buying a house or a car if you are availing of loans to make the purchases. 

It helps if you have additional savings during a possible economic slowdown. Moreover, not having severe debt enables you to navigate through a job loss. In simple terms, you must avoid loan-fuelled purchases during a possible economic downturn. 

5. Stick to your asset allocation

It would help if you did not scale down your investments during a possible financial crisis. It would help if you stuck with SIPs in equity funds to attain long-term financial goals. Moreover, you must maintain your asset allocation even in uncertain times. 

For instance, you may have an asset allocation of 50% in equity and 50% in debt. It would help if you maintained the asset allocation even during a possible economic slowdown to attain your financial goals. 

You must upskill yourself during a possible economic downturn to protect your job or search for a new one. It would help if you stuck with goal-oriented investment. It helps if you build an emergency corpus for living expenses during a job loss. Get rid of any debt and avoid availing of new loans during a possible economic slowdown.