What Goes Up Must Come Down, But Are You Prepared For The Free Fall?

Source: <a href='https://www.macrotrends.net/countries/ZAF/south-africa/gdp-growth-rate'>Source</a>

While South Africa has been in JUNK status for a while now, the outbreak of COVID-19 did not help as we witnessed the country dive deeper into economic recession in 2020. Production slowed down, unemployment increased accompanied with more paycuts than we have seen in a while. We hope for deflation but the best we have received is a lower inflation rate. And like the saying goes: ‘when life serves you lemon, make lemonade’ this piece should assist you to, at the very least cope and at best thrive in an unfavourable economy.

After a pay-cut or being laid off, the sad news is you have less income to cover the same amount of expenses. It is better to let your creditors know well in advance if you will not make payment in full or part instead of letting the debit orders bounce several times before communicating your financial problems as this will affect your ability to get credit in the future. During a recession it is best to pay off high interest debt as soon as possible. But how high is ASAP high?

If interest on debt is higher than interest you receive on your savings, that is “as soon as possible” high. To stimulate growth in the economy, interest rates become lower, which would encourage taking debt and perhaps you can consider this option when the economy starts to recover. In short, taking on new debt during a recession should be approached with caution.

Should you save during recession? Yes, this is the safer option, but I trust you to apply your mind if you dare to do different. Imagine paying off debt only to have to take more debt or even worse, paying off high interest debt then not having money to pay the rest of the debt and failing to sustain yourself, and because of stricter credit policies during recession, failing to secure further debt. Treat life like a chess board.

My greatest fear of investing during a recession is having the stock market crash while my money is in it. I can only imagine how small-scale investors might have taken it when COVID-19 first hit, and we had that sudden dip in the market. And while we cannot prevent a stock market crash, we could better prepare for it. During a recession it is best to invest companies which have proven to withstand the test of time and continue to be efficient and innovative. Recession will wipe out companies that cannot use resources efficiently. The most recent company statements might not be as useful as historical data of the company, although I do not advise using one set and not the other.

If your investing mindset has always been to buy companies which are efficient, I figure you need not worry as you can trust your investments to recover, and all that you would have is only a paper loss. During a recession is a good time to buy those companies that have been too expensive for a long time as they might be at their low point too. Bargain!

While I cannot tell you with certainty how the economy will unfold, I do suggest you get better at maneuvering during these times. For more, join our growth list to stay in the loop with our blogs, as well as other content to sharpen your financial literacy. Follow us on Instagram and Linkedin.

Author: Lerato Nxasane

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