Recessions-how do they affect us?

The ongoing streak of layoffs across the globe has made ‘recession’ a buzzword. A recession can be described as a general decline in economic activity. Industrial and trade activities as well as consumer spending are reduced. Technically, if the Gross Domestic Product (GDP) goes down in two consecutive quarters, then the country is considered to be in a recession.

Recession affects every single person in some way. Let us see how a recession can impact us on the financial front:

• Companies cut back their workforce in anticipation of decreased consumer spending. New hiring takes a back seat, and the job market in general becomes less lucrative. The company may offer fewer financial incentives, for example, promotions, increments, and bonuses. You may find yourself out of a job without any fault of yours.

• The stock market may experience volatility. Your investment portfolio may take a temporary hit.

Recession is an inherent part of an economic cycle. Just like all things, it is a phase that will eventually pass. But, this can be the time to take stock of personal finance.

Here are some ways to reduce the impact of recession:

• If you do not already have an emergency fund, now is the time to build one. Set aside funds equal to your six-month expenses. Make sure it is readily available when needed.
• Avoid big purchases, unless necessary.
• Pay off your credit card debt. Using a credit card may become more costly if the interest rates rise.
• Keep your spending habit in check.
• Do not discontinue your SIP unless you have exhausted all other cost-cutting measures. By discontinuing the SIP, you lose the rupee cost-averaging benefit. If the NAV goes down, you get more fund units, bringing down the average purchase cost of the fund, thus offering more room for growth.
• The market may be volatile for an extended period. Avoid reacting based on emotions and hearsay.
• Do not lose focus of your long-term plans, such as retirement savings. Recession today need not affect your plans that are 5-10 years away from being accomplished.

In times of a financial crunch, always stick to the basics of personal finance. Prioritize needs, limit or do away with wants, avoid taking new loans, and don’t disrupt your long-term financial goals unless there’s no other way out.

You can also look into up-skilling and find ways to start a side hustle in order to generate some additional income sources. Even minor additions to your income can be a very helpful cushion during a recession.

This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The material is prepared for general communication and should not be treated as research report. The data used in this material is obtained by Axis AMC from the sources which it considers reliable.

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