A FINANCIAL STORM IN A TEACUP?

Recession, here, recession in that country, recession in the world – this has been topping the charts of newsrooms and various forms of other media for months now.

istock / indiaTimes

Currencies like the USD$ continues to rise and strengthen even further on one end of the currency scale, while currencies like the Malaysia Ringgit (MYR) continue to tank. Malaysia is largely, a trading nation and uses the USD$ in most of its trading transactions.

Then, we watch, hear and read about countries that have succumbed to tough times, the latest being Sri Lanka where it is strapped for cashflow which technically means it is bankrupt. Or so, as per what is told to us by the media.

To be more accurate, a country never goes bankrupt. When a country fails to repay its debts, it defaults on the loan. Second, the government, defaults, not the country.

Sri Lanka has its natural resources and trade, amongst others; that contribute to its economy. When you think of Sri Lanka or its name of the past that it was famous by, “Ceylon”; you think tea. “Ceylon tea”. The government of the day of that country defaults in its financial repayment obligations.. An incoming government that takes over from the government of the day, inherits these financial obligations. It has to turn the economy around.

“Recession” – reasons to picture black skies, tornadoes or typhoons in economies. The economists and financial analysts – the “knowers of the financial future” rush to outrace each other to majordomo the bleak news of a world recession.

My beef is that all these financial experts predict with certainty or can I say “know for sure” that the world is heading for a steep fall off the cliff, i.e. recession. The keyword here is “predict” because in the interviews they give over the media, they always say, “I think” which in simple layman’s language means, “for sure, I am not sure”. Therefore, it is as it states: prediction or theory.

There are signs, sure…cost of living continues to rise, so does the negative prediction charts.

Let’s say that signs do show that the world is heading for a recession. We are on a collision course with recession. How much time is spent trying to prevent it from happening or trying to cushion or lessen the impact?

The focus should then be on preventing the recession, or the very least, “minimize the impact”, don’t you agree?

What is a recession? According to Investopedia, a recession is a significant, widespread, and prolonged downturn in economic activity. Because recessions often last six months or more, one popular rule of thumb is that two consecutive quarters of decline in a country’s Gross Domestic Product (GDP) constitute a recession.

On the other hand, we hear another word being tossed around – “inflation”. So, what is inflation in economics? According to the Oxford dictionary, inflation is a general increase in prices and fall in the purchasing value of money.

Therefore, a recession makes the economy move much slower due to a decline in economic activity and potentially higher unemployment. Inflation would be the opposite, making the economy charge at full speed, sometimes uncontrollably, leading to price surges and a higher cost of living for the average consumer.

Which leads us to stagflation. Stagflation or recession-inflation is a situation in which the inflation rate is high or increasing, the economic growth rate slows, and unemployment remains steadily high.

A financial storm in a teacup?

What do we, as the everyday person; do from here? We have to be ready just in case it is not a storm in a teacup.

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Always have additional sources of income if possible and invest in any way you can for the long term. This may be an opportunity for us to explore some of our hidden talents.

While everyone’s circumstances will be different, there are a few key tenets that people should adhere to in nearly all situations:

  • Emergency Fund – It is important to have an emergency fund. This is money you have set aside that you can use in times of emergency. You should aim to have at least six months worth of living expenses saved in your emergency fund as a general rule of thumb. This emergency fund should not be touched unless it is for as it states; “an emergency”. It should also be easily accessible for that emergency, only.
  • Minimizing Debt – The next step to prepare for a recession is you have to try to reduce your debt as much as possible. This means paying off credit cards, car loans and the likes. Don’t add on more debt. Cut down spending. All this will take some pressure off you if a recession begins and your income starts to get squeezed.
  • Managing Your Mortgage – Finally, if you have a mortgage, you may be able to work with your mortgage provider to restructure your monthly payments, at least for a short period of time, somewhat like a moratorium. This could take some pressure off you if you are seriously struggling to meet repayments each month.

The baseline is to take a more conservative approach, having easy access to funds if needed and having minimal debt.

NOTES:
There are many helps available to help you with your financial planning. In Malaysia, one of the ways is Malaysian Compass Catholic NYFGW.
To find out more on Malaysian Compass Catholic NYFGW; and its next preview, go to this link: http://bit.ly/CompassCatholic

fig.1 milspousemoneymisson

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