What does the recession mean for your household?

Comic Sam is busy counting his household money to prepare for the household recession that is coming.

(household – 5 minute read)

Last time we wrote about how to weather the recession for your business. This time we’re going to get more personal. That’s right! Let’s look at what the recession means for your household and what you can do about it!

A recession means a tighter job market

This is a pretty hard claim to make, since right now unemployment in Aotearoa is at an all time low. Wages are on the rise as workers demand higher pay to keep up with the rising cost of living. So far, so good.

However, it is likely that the wage demand pressure on employers may force them to rethink the contribution of each role. Hiring may freeze once the recession hits and businesses will struggle with the loss of demand from the consumer side of the profit equation. If demand drops badly enough, existing roles may be made redundant.

So what is an individual worker to do in the face of all of this?

Talk to your manager/boss

Be proactive. Schedule a meeting with your manager/boss to talk about your concerns regarding your job security. This can be difficult to pull off, depending on what your work culture is like. But you’ll never know until you try. Ask them what they think the future prospects are for the business and what they plan to do about the oncoming recession. Forewarned is forearmed!

Evaluate your position/role at the business

Have a think about your position/role at the business. Always think in terms of:

  1. What’s the value of my contribution to the company?
  2. If I left, how much would it cost the company?
  3. Do I have a good working relationship with my colleagues/superiors?
  4. Have I been performing to my level of satisfaction in the company?

This gives you a better idea of whether or not your future income security is guaranteed. If you’ve had that conversation with your manager/boss, this self evaluation may be easier to do.

Stress test your household finances

Running a household is like running a business. Money comes in from your work, money goes out to maintain your standard of living. What you need to test is whether your household can survive a drop in income. As always, I like to ask readers to consider the ‘big five’ expenses (the largest chunk of expense that most households spend on):

  1. Your monthly rent/mortgage payments
  2. Groceries
  3. Eating out
  4. Fuel expenditure
  5. Power and utility bills

Work out what your average monthly expenses are like for the above five and you get a good idea of what you need to spend to maintain a decent lifestyle for your household. Note that you may have other recurring expenses that happen monthly, like insurance or a car loan that you need to service. You will want to add those to the calculation as well. Avoid putting in luxury spends like new clothes, shoes, boardgames or digital gadgets – these should not factor into your monthly expenses.

What is your household surplus?

You want to examine how much surplus you have. Surplus is your income minus your expenses. This surplus also shows you how much you income can drop by before you need to make some serious adjustments to your monthly spend.

For example:

The Chan-Ramanathan household spend about $8,000 on their big 5 monthly expenses. Both parents have a combined income of $12,000 a month. They have 3 children to look after aged 8 to 14. They have a monthly surplus of $4,000.

This means that the Chan-Ramanathan family can suffer up to a $4,000 drop in monthly income before they need to make adjustments to their spending.

Plan for a drop in income

Stress test your earlier assumptions. If you lost your job, would you be able to meet the Big 5 expenses? What about if both income earners lost their jobs? Sit down with your partner (if you have one) and think about what can be done in reducing your expenses. Here are some ideas to consider:

  1. Examining the insurances that you are paying and determining if you need them or need to find cheaper providers
  2. Switching to a cheaper power provider
  3. Reducing fuel usage (which is easy to do if you’re jobless)
  4. Cooking food at home more VS eating out/buying takeaways

The idea is to have a plan in place case the worse happens.

Have an emergency fund

Many financial writers will have some variation of how much you need to put in your emergency fund. If you have one, great! If you don’t have one, it can be quite daunting to save up to 3 or even 6 months of your monthly spend. Yikes! If you’re just starting, I recommend aiming for having at least 1 month’s worth of average expenses for your household saved up.

This amount will at least give you 1 month to apply for benefits, look for a new job and plan to reduce your expenses. It’s time to start building up that emergency fund! Sell stuff you don’t need/use and make an active effort in putting a portion of your salary towards it! You got this!

Be on the lookout for the next thing

A recession is scary, but they don’t tend to last too long (assuming the government does a good job in handling the situation). Being proactive is key. Scope out the job market before you lose your job. See what other opportunities are out there. This may even be a good time for you to think about pursuing that side hustle that you’ve always loved doing.

Turn crisis into opportunity. Learn from it and become stronger because of it!

And as always,

Stay positive!

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