Don't Panic! It's just a recession.

With all economists warning that the western world is on the brink of a global recession – and even inklings of another depression - find out what this means for the average Joe and how you can manage your finances through these financial times.

Just the word ‘ depression ’ sends shivers down the spine of economists but we’re now looking at the major western economies – US, Australia, Europe and UK – all in recession and maybe even on the brink of depression , with the US undoubtedly the hardest hit.

But what does this really mean to you and me? And more importantly, what can we do about it… well read on to find out!

A recession occurs when there is a general downturn or slow down in the economy – people aren’t earning as much, or spending as much – and is considered a ‘normal’ and manageable part of the business cycle. After some time, the economy recovers and the cycle starts again.

A depression is just a degree worse, and is typically when the economy slows by more than 10%. This can result in job losses or significant cuts in salaries, inflation (or deflation) and reduced values of property and investments.

The current global economic crisis is due to the collapse of the sub-prime property market in the US. And because the US represents about 20% of the world economy, there is a domino effect to other economies – US stocks lose value, reduced imports to the US reduce income for other countries and so on.

But whatever the reason for a recession (or a depression), it just means that you may have less money available than you did, and the money you do have won’t go as far as it used to. And even though recessions typically only last 2-3 years, these can indeed be tough times for normal people like you and me.

But there are some things you can do to help yourself through.

First of all, DON’T PANIC! Recessions and depressions have happened before – and the world has got over them and moved on. We WILL get over this current crisis – but it may take a few years (or maybe more) to really get back on track.

So:

• Don’t panic sell – unless you have to. The horse has already bolted when it comes to selling to avoid losses. If you sell now, you WILL lose money.
• Hold onto property, unless you can’t afford to keep it – property will almost always return its value once the recession/ depression has passed. Be aware though that this may take some time.
• DO seek financial advice on your particular assets and investments – there is also a risk attached to holding onto your current investments (particularly stock). Get professional advice on your stockholdings and the best strategy for minimizing your losses.

Secondly , since in a recession earning more money could be more difficult or things may cost more, the emphasis needs to be on making the most of what you have. So budget like you’ve never budgeted before!

So:

• Scrutinize your spending – go through your last credit card statement and see where your money really went. And then…
• Cut Costs – cut back on unnecessary spending. See Your Money and Finance for cost cutting ideas…
• Cut back on the use of utilities – save power, water, walk to work and reduce your use of the phone. You’d be surprised how much these utilities cost you.
• Don’t be tempted to cut back on insurances – it’s times like these that you need to protect what you have.
• Prepare a new budget to see you through these tough times.

Over the past decade of relative affluence, our spending habits have become rather decadent. So a bit of reigning in of expenditure is probably a good thing for improving long term spending habits .

And thirdly , take advantage of the opportunity to invest in some real bargains!

If you have any spare cash:

• Pay off your debts.
• Invest in Gold.
• Invest in carefully selected property, if you don’t need to take out a significant mortgage to do so – and pay off any mortgage as quickly as you can.
• Invest in carefully selected dividend stocks – see a financial professional for advice in this regard.

And don’t forget about charity ! If you think you’re doing it tough, just think about the people out there who are even less fortunate.

Note: It is important to seek professional financial advice before investing in anything!

Just remember that in 5 years time you’ll be able to look back at today’s financial crisis and evaluate how you handled it. Make sure you can give yourself a good financial report by making decisions now based on best financial advice.