Bitesize: 5 Expert Tips for Surviving During a Recession

Alec: [00:00:07] Welcome to bitesize on Get Started Investing. In this series we feature some of our favourite lessons, quotes and moments from the podcast. If you'd like to listen to the full episode, we've included the link in the show notes. 

Bryce: [00:00:21] All right, so we've got five things from personal finance experts on how to manage your finances during a recession, and then we'll analogise those to steps that companies should also be taking and how you can think about the companies that are in your portfolio. So the first one, you're hitting a recession. Bulk up on your emergency fund. 

Alec: [00:00:43] So this is like the classic thing. You know, as we were researching for this episode, personal finance expert after personal finance expert, this is the first point in times of a recession, always have an emergency fund. In times of a recession, bulk up. You know, the rule of thumb, three months is up. And some of the articles I was reading say think about how you can bulk up to like six months and stuff like that because the logic is you could lose your job. The percentage chance of losing your job increases in a recession. So that's what we should do from personal finance. Well, that's what the experts tell us we should do from a personal finance perspective. Turns out companies also need an emergency fund.

Bryce: [00:01:22] Yeah, well, they should definitely take the same approach. Bulking up the emergency fund is essentially protecting them from less business if they're going to have less revenue coming in. In a time of recession, customers aren't spending money with them as much as they were in good times. They're going to need to have an emergency fund to cover themselves for their three months or six months expenses, whatever time period that they put there. And how do we measure this rent? 

Alec: [00:01:48] So you'll hear about a balance sheet. And basically that's the amount of it shows the amount of assets a company has, the amount of liabilities they have. But in that on that balance sheet, you can see how much cash they've got in the bank. There'll be a line that says cash or cash equivalents and you can say they've got $200 billion in the bank, they got $2 in the bank in the same way that we personally should have emergency funds in case things go wrong. In tough economic times, companies need that cash buffer as well. So that's one. Do they have cash?

Bryce: [00:02:22] What is their spending, their emergency fund? 

Alec: [00:02:25] Is it an emergency? I don't know. Hopefully, yeah. It Looks like if a company is unprofitable and they have no money in the bank, you get nervous. If a company is unprofitable and they have like ten years worth of cash in the bank, they can continue to be unprofitable. Then you be like, all right, well, they have the emergency fund to survive through the downturn at the moment. That's how you look at it. Yeah. 

Bryce: [00:02:48] Survival. All right. So the next hit from personal finance experts on managing finances during a recession is to try to ensure that if you haven't lost your jobs and at least your salary or income stays as stable as possible.

Alec: [00:03:04] Yeah, make sure your income stream is stable. That's a key thing that personal finance experts talk about, and we can think about that with the companies that we're looking at to invest in as well. Is their revenue stream stable? Are the customers that they're selling to good quality customers that will continue to be able to buy their goods or services even in a recession, for example, the US government is unlikely to go out of business no matter how bad a recession gets. So a company that sells to the US government, that's a pretty stable revenue stream. On the other hand, we saw a recent example are Shopify. Shopify People talk about it as a really high quality business and what they do is they enable e-commerce businesses to set up e-commerce shops online, really high quality business, but their customers are not as strong as the US government. A lot of unprofitable e-commerce players are struggling at the moment. And so Shopify has been struggling as a result, not because their product is bad or their business is bad, but because a lot of their customers are struggling and that means that they're struggling. So lesson number two, in the same way that we want to share up, shore up our salaries, companies need to shore up their revenue streams. 

Bryce: [00:04:24] Number three, ensure that we're spending less than we're earning. This, I think should apply recession or no recession, but particularly in a time of recession, make sure that what you've got coming in is more than what is going out. There's no way that you can build an emergency fund and add to it if you've got more coming out. Yeah, same goes for a company. Is the company profitable? I.e. are they spending less than they're earning? Yeah. 

Alec: [00:04:49] And importantly here, if they're not so many of the companies of the last few years not profitable, but are they taking the steps to become profitable? Is that what they're focusing on? Yes, we saw that in Australia with the buy now pay later players zip the market loved it when they said they were shutting down Singapore shut. Down some of their business units because they were like, we're going to we're going to do everything we can to become profitable in tough economic times. If you're spending more than you're earning, that's a red flag. And if a company is spending more than it's earning, that's a red flag, because it's going to be difficult to get more money.

Bryce: [00:05:22] Yeah, I would caveat as well that if you do see headlines about companies you're invested in, cutting costs at times of recession, don't always take it as bad news. It can be seen like as we've just said here, they're doing the right thing in a time of recession. 

Alec: [00:05:37] Why is that a caveat? 

Bryce: [00:05:37] I don't know. Just because someone might be sitting there going, Oh, I'm company. Lesson number four, paying down debt. Times of recessions

Alec: [00:05:46] This is a classic one from personal finance experts. The chance of you losing your job is high. So don't have unnecessary debt because it's risky in times of a recession. Same with companies. They might lose key customers that their revenue might dry up. You want to get that debt off your books. So it's just not hanging over your head. 

Bryce: [00:06:08] And then finally, despite all of that, continue investing for the future. So continue to add to your retirement account. Continue to take advantage of those low prices where you can. If you enjoyed that bite size, you'll find a link to the full episode in the show notes.