What If A Recession Strikes This Year? 5 Signs That You Are Not Financially Ready For It

At a time when rising interest rates, back-to-back bank collapses, inflationary pressure, and mass layoffs are deepening global recession fears day by day, what can you as an individual do?

Should you just live in fear of a possible recession and wait for it to strike and cause financial damage? Certainly not. Instead of just leaving everything to fate, isn't it wiser to make yourself financially prepared for a recession?

And if you think that you are already well equipped financially to handle a recession, then just wait and read this out. Make sure you have the following bases covered, which are otherwise signs of you not being financially prepared if a recession strikes this year:

Signs That You Are Not Financially Prepared For A Recession

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Sign 1: You Don¡¯t Have An Adequate Emergency Fund To Tackle Rainy Days

More often than not, it's the rainy days that make us realise the importance of an umbrella. Similarly, a financial emergency is what often makes us realise the importance of having an emergency fund, also known as a contingency fund or rainy day fund.

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An emergency fund is one of the most important pillars of strong financial health, especially when uncertainties and recession fears are looming. That is exactly why having an adequate rainy-day fund is a crucial step in remaining financially ready for a recession. This fund acts as a cushion during financial emergencies that can be in the form of a sudden job loss, severe illness, disability, or significant pay cut. In all such adverse financial events in life that can temporarily hamper your income inflow, having an emergency fund can rescue you by helping you carry on with your recurring monthly expenses.

It is usually advisable to have an emergency fund with an amount equal to at least six months of your recurring monthly expenses. The size can be even bigger, such as 9¨C12 times the monthly expenses, if you can maintain that size. After all, the bigger, the better! The recurring monthly mandatory expenses to factor into the fund are your rent, utility bills, loan EMIs, monthly investment contributions (like SIPs), insurance premiums, your children¡¯s education fees, etc.

Also Read: Looking Back At The Last 4 Global Recessions & Why They Happened

Sign 2: You Don¡¯t Have Liquidity & Diversity In Your Investment Portfolio

Liquidity and diversity in your portfolio are the two pillars that can help your investments sail through testing times like a recession.

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Firstly, having a diversified portfolio means spreading your investment allocations among different assets and investment vehicles so that your overall risk is minimised. If you fail to have a diversified portfolio and your investments are heavily dependent on a particular asset or investment vehicle, this can increase the risk of your portfolio and reduce your chances of balancing the risk-reward ratio, especially during uncertain economic scenarios.

But when trying to diversify, do not end up treating diversification as duplication. Both are entirely different. With diversification, you are investing in different asset classes to spread your risk, whereas with duplication, you are investing in different investment vehicles or asset classes that have a similar nature and are not inversely related.

Secondly, having liquidity in your investment portfolio is equally important, as the liquid money can help your cash flow whenever you need the funds. In India, since PPF, real estate, and gold are among the popular investment options, many people are often stuck with liquidity crises when adverse financial situations arrive.

As these are relatively less liquid investment options, which often result in you falling short of liquid money or cash when needed, isn't it wise to shift, or at least have a part of your investment portfolio kept in highly liquid instruments, like savings accounts with high interest rates (like small finance banks and some private sector banks) and liquid funds (a category of debt mutual funds)?

Or else, if you still choose to let your investments remain entirely invested in low-liquidity investments such as PPF (which has a 15-year lock-in period), tax saving FDs (five-year lock-in period), real estate (which can usually take some weeks or months to find the right deal), etc., you are likely to fall short of liquid money to fall back on when the need arises, which may further push you to borrow from friends, family, or banks.

Sign 3: You Are Not Credit Ready If The Need For A Loan Arises

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It's a no-brainer that a good credit score is no less than a financial asset nowadays. This three-digit numerical representation of your credit history, which generally ranges between 300 and 900, is important when lenders assess your application for loans and credit cards. A credit score depicts your creditworthiness on the basis of your past credit card and loan repayment behaviour.

Click here to understand how credit bureaus calculate your credit score.

As your credit score helps lenders assess your creditworthiness through past repayment history, it also indicates the degree of likelihood of you defaulting on the loan or credit card repayments in the future. A good credit score will portray you as more trustworthy, whereas a low or no credit score would make the lender take a cautious approach when deciding whether to accept or reject your application. That is why you must remain credit-ready with a good credit score so that you are eligible to get a loan or credit card whenever the need arises.

Wondering how to have a good credit score? These are the most important factors that affect your credit score. Also, make sure you are not practising these habits that may be harming your credit score.

Also Read: How A Good Credit Score Can Help You Save Lots Of Money

Sign 4: You Haven¡¯t Taken Up Side Gigs For Passive Income

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Irrespective of whether you are currently an entrepreneur, engineer, doctor, journalist, or into any other career, it's likely that there is some hidden talent, creative outlet, or hobby about which you must be passionate.

Keeping in mind the mass layoffs and economic uncertainty looming, why not monetize your passion by turning it into a side gig? This can be a financial cushion and an additional source of income for you that can come in handy during financial uncertainties such as a recession.

To learn in detail about various side gigs you can take up, click here.

Sign 5: You Don¡¯t Have Life & Health Insurance

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Another big sign that you are not only financially unprepared for a recession but even don't have a vital financial base uncovered is the absence of insurance.

If you still don't have life and health insurance despite the COVID pandemic and mass layoffs being massive wake-up calls, especially for youngsters, then wonder what is holding you back from understanding the importance of these two.

Firstly, the primary objective of buying a life insurance policy is to provide a replacement income to your dependents in the event of your untimely demise. Make sure your life insurance coverage amounts to at least 15 times your average annual income. You can prefer purchasing term life insurance over other life insurance products as it provides large life coverage at very low premiums.

Secondly, in addition to term insurance, it¡¯s equally important to have health insurance. Click here to understand the benefits of buying health insurance.

Keep in mind that having a health insurance policy with adequate coverage reduces the risk emanating from rising healthcare costs. Youngsters should also remember that even if their employer provides coverage under group health policies, such coverage is usually inadequate to meet hospitalisation costs, and such policies lapse once they switch organisations. This leaves you without health coverage until you get covered through another employer-provided health plan.

Also Read: How To Be Financially Prepared Amid Mass Layoff Wave

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