“Perhaps the developed world is about to experience massive structural change”, mused my mate as we discussed the global financial situation recently.
In truth no-one knows what will happen.
The great news is that the actions which prepare you to survive a massive change also position you to thrive if instead a boom arrives. So irrespective of your personal forecast it is worth implementing these suggestions.
What could happen
If massive change arrives it probably won’t be pretty. You may experience some of the following:
- You lose your income, maybe for an extended period.
- Just to keep food on the table you have to sell assets, maybe including your home, cheaper than what you paid for them.
- Your loved ones lose their income and assets and move in with you.
- Your investment values go sideways or even down.
It’s all about cash flow
To keep food on the table and a roof over your head you need cash flow. Your best bet to keep money flowing in is to keep your job.
Even in the Great Depression seventy per cent of Australian men remained employed, so if you play your cards right there’s a good chance you’ll stay employed.
To protect your employment income you need to maintain expertise of value to your employer, your industry and to the country.
One way to achieve this is through ongoing professional development. Another way is by being more productive – work smarter, not longer.
For some people though, reskilling and reinvention will be necessary. This will likely apply to those working in retail and other consumer discretionary industries. Don’t despair – these days changing careers is the new black.
Contain your expenses
Borrowing to the max seemed normal while wages and asset prices grew steadily. But it’s now evident many financial houses were built on unsuitable foundations. To survive and thrive avoid over-committing to large debt repayments that are reliant upon two incomes.
Make like a squirrel
It’s time to make like a squirrel and save up your nuts for winter. Build a reserve of emergency funds you can use to fund your expenses if the worst happens.
The best emergency fund is cash you can access within about 1 to 2 days’ notice. The cash can take a number of forms including:
- Actual cash in a high interest online bank account
- Available redraw on your mortgage because you are way ahead in your repayments
- Withdrawal capacity in a personal line of credit secured against your home
Don’t rely solely on your investments
You may be thinking your investments are your backup plan.
If massive world change arrives it may be the worst time to sell your investments. In fact for lumpy assets like property you may not even be able to find a buyer. I know people who during the Global Financial Crisis couldn’t find buyers even after cutting prices.
In a “crisis” companies may slash dividends to preserve cash, leaving you empty handed.
And if people start bunking together to save costs your investment property may be without tenants. Or you may have to slash rents just to get a tenant.
So don’t rely on living off your investments if you lose your job for an extended period.
When the sun shines
Of course doomsday may never arrive and instead we’ll re-enter years of prosperity.
In that case, having invested in your professional development you’ll be in demand and may experience significant pay increases.
As a diligent debt repayer you won’t care as much when interest rates go up (to curb inflation) because you’ll have much less, if any debt.
Couple the higher income with contained expenses and you’ll have plenty of surplus income to invest in funding your early and luxurious retirement.
Follow this timeless, common sense approach and you can confidently keep a “she’ll be right mate” attitude no matter what happens.