How does the recession affect your money?
Updated: Jan 30, 2020
In some of our social circles there are whispers:
“Things are looking really bad!”
“Stop spending your money”
“Buy gold”, and more such cautionary statements.
Yes, the world could be at the cusp of a recession which experts believe shouldn’t last more than a couple of years. If the recession does happen, India should be insulated for a long time. It will start in the US, go down Europe and then get to the emerging markets through which India maybe hit the last and perhaps the least.
What is a recession?
Economists define a recession as a period of economic slowdown for at least 6 months, and during which there’s a widespread drop in spending. The good news is that markets are cyclical, and a recession eventually ends.
India’s slowdown in the last quarter
India’s GDP (Gross Domestic Product or the market value of final goods and services produced) growth has slowed down to 5% in April-June, the slowest pace in 5 years, and a rate that has missed expectations.
The media has done a good job in blowing this out of proportion. While things may not look as robust as they used to, all the major world economies are in this phase or worse.
The RBI has cut rates, and these rate cuts are being passed on the average Indian consumer. What this means for consumers is that home and auto loans are cheaper!
Development versus growth
The speed of execution is unprecedented in India. We have been living with a fractured system, and now that is changing. We have also confused development and growth and used the terms interchangeably. Development is a long term journey, improving factors such as education and quality of life. By 2024, India is expected to have the largest working population in the world, most of whom will be educated – and estimates indicate that we will be the third-largest economy in the world! Yes, there has been a slowdown in growth, but that’s in the short term.
In fact in the time to come – as things improve – consumption will increase. In turn, this will drive capital markets, which will drive the GDP too. We can drive looking into the rear-view mirror as long as there is nothing ahead of us. If we keep looking back, we will miss seeing things in front of us. Let’s think of India 5 years into the future: do you see India in shambles? Or do you see it as a country that is showing positive signs of development?
At Basis, we will keep you posted on any updates that might affect your financial life.
So, what do you do now?
Maintain an emergency fund: This is something we talk about as basic personal finance principles, something we ask to maintain when things are good or bad. In fact, had you started building this already you might have been cushioned by now. So start now if you haven’t already
Minimize spending on the nice-to-haves: Prioritize your expenses, and focus on prudent spending. This is an evergreen principle, not just something to follow during a potential cusp of a recession, or an economic slowdown.
Negotiate for cheaper loans: If you have existing loans, look into re-negotiating that rate with your bank.
Do not take any knee-jerk reactions with your money. Follow the best practices of personal finance that we have been sharing for a while now and you should be fine! While things could possibly not look great for a bit, making the right decisions now could have a long term impact on your financial well-being.
“There seems to be some perverse human characteristic that likes to make easy things difficult.”- Warren Buffett
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