No Need To Plan For Recessions

One Fool explains why there is no need to plan for recessions, provided we're managing our money properly.

This article was first sent to Fools as part of our 'Cracking The Credit Crunch' email. This time we consider whether it's necessary to plan for recessions.

As far as we individuals are concerned, recessions are mostly about what happens to our jobs.

In a recession the nation is producing fewer goods and services, so therefore we buy less. This reduces businesses' profits, which reduces investment in business. This investment includes investment in staff, e.g. hiring and firing.

This means that more of us lose our jobs during a recession, and we find it harder to get new ones that pay the same. If we do manage to get similar jobs to the ones we've lost, we may well be offered fewer hours. Self-employed people see their incomes fall. Finally, those who are already not in work find it even harder to get a job, because few firms are hiring new staff.

What can we do to prepare for recession?

A recession over the next year or two is by no means certain. In fact, most economists are not predicting one.

However, economic forecasters get the difficult predictions wrong far more often than they get them right. (As economist  J.K. Galbraith said: 'The only function of economic forecasting is to make astrology look respectable.') In any event, recessions do happen. They'll come up again and again in the future, even if one isn't imminent.

My first tip to protect yourself from a recession is to make yourself invaluable to your employer, so that you're last to be fired.

My second tip is simply to be Foolish. (Motley Foolish!) At all times you should be saving money and borrowing as little as possible, so there really should be no need to change your money ways if you think a recession is approaching.

If you're not Foolish after all this time (how many years have you been reading this website?) then I don't hold out much hope for you fixing your ways any time soon.

But please prove me wrong! Sort out your finances now, because that's all that preparing for the bad times is about.

It's really quite simple

Our report into recessions shows what people intend to do to improve their finances in case of a recession. Mostly, this means reducing spending, presumably so they can save for the hard times or reduce their debts further to limit the damage caused by redundancy.

The biggest things that people have said they will do is have fewer nights out or takeaways (67% said this), control impulse buying and retail therapy (67%), and buy fewer clothes and accessories (54%).

Notice that these are the expenses that we often don't budget for. Today, a colleague of mine surprised me with a rhetorical question: 'Does anyone actually budget for nights out?'

Of course we do. Each month I have a maximum budget for such things. If we don't do this, our money can disappear very quickly, and we don't even realise where it's going. All we know is that it's not going in the emergency fund, or to reduce our debts.

So those three areas for making cutbacks (nights out, retail therapy and buying clothes), plus holiday spend (49%) and gadgets (45%), are where people need to say, 'Right, this is my budget for the month and this is my budget for the year, and not a penny more on these items shall I spend!'

It's highly likely that people who already budget for these things are also good with their money in other ways, so they will weather the storm of any recession far better, on average, than those who don't.

What I'm trying to say is, there should be no need to plan for a recession, because you should be doing all the right things with your money anyway, all the time. This includes budgeting and saving for emergencies, such as redundancy, whatever the cause of it.

Finally, think about what causes a recession. There are always several causes actually, but it's often partly caused by us consumers spending less money, so the economy shrinks. We spend less when we have less spare money after bills and expenses. So how do we get more spare money? Answer: by budgeting better. Why wait for a recession to start?  

> Get an emergency-savings account or cash ISA.

> Read about:
Budgeting.
How to get a better job.
How to get out of debt.