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Financial Planning During Recession Research Team | Posted On Sunday, October 04,2009, 11:50 PM

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Financial Planning During Recession



There is no doubt the recession is the worst time man has ever faced. It started slowly in the United States and within no time engulfed the whole globe in its clutches and has affected each and every individual be it an American citizen, Indian or British, no one has been spared. There were many things from Indian system which were very less affected by the recession one of them was the Indian banking system. The Indian banking system is one of the least affected in the whole world and has been praised by many of the economists, financial experts. For example one of the banks Washington Mutual (WaMu) went bankrupt and was one of the biggest bank failures in the history but not even one Indian bank went to the extent of bankruptcy except there was a panic in many customers that the ICICI bank was getting bankrupt and as result of that the people stood in front of the ATM overnight to withdraw money. The banks were saved from this downturn because of the financial policies which were very well formulated which acted as an insulator for the Indian banks. If we want to be insulated from the side effects of recession then we also need to have a good financial plan in place and need to make the necessary changes so as to overcome the new obstacles thrown in by the recession.

The term recession has been appearing in the newspaper in the past one year almost every day and it has become a mediocre word. The recession has been defined as the Recession is not to be confused with depression. Recession means a slowdown or slump or temporary collapse of a business activity or to sound like an economist you can define recession as the state of a decline in GDP in two or more consecutive quarters. A person has to be financially insulated to escape the affects of recession it cannot be guaranteed that with this plan an individual would be not facing any difficulties but one thing that can be guaranteed is that the problems and the damage will be reduced to minimal. In this article we will be having a look at the various ways in which one can be financially sound by having a good financial plan.

Steps or precautions to be taken During Recession

Following are some of the precautions you have to take during recession.

  • Make sure that your cash inflow is more than cash outflow. Usually we don’t maintain an account in which we don’t record the total income from all the sources that we have and all the investments that we do and this leads to the shortage of money.
  • Reduce the usage of credit cards during recession. The credit cards may seem like a way out for getting easy money at a faster rate but at the end of the month when the bill comes we realize that the money that we have spent is much more and the interest rate also depends and varies from one bank to another which are providing credit. While we are withdrawing the money we don’t think about the interest rate.
  • If a person doesn’t have enough knowledge then he can approach the professional financial planners for getting a good plan. The sole purpose of approaching a financial expert is that they know in and out of the financial planning and have a good knowledge about the changes that are happening in the market which can have a profound effect on the individual.
  • Have a check on your lifestyle. During the good times when the economy is booming spending lavishly doesn’t affect your financial position but the recession is one thing which brings some of the most dangerous factors such as unemployment, loss in the value of the rupee value, inflation, unemployment etc along with it which can topple your position and within no time you will find yourself that your cash reserves are getting over so it is better to have a control over it.
  • Reduce using your vehicles. This you may find funny but just imagine the price of the petrol was nearly around 45 rupees in the last year during the same time but has jumped to 55 rupees now so if we are going for a litre of petrol everyday then the monthly increase in the petrol consumption is going to be nearly 300 rupees. This may look a small figure but when there are pay cuts happening, loss of jobs, no bonuses or increments paid it can make a difference.
  • The purchase of Gold ornaments can be avoided or reduced till the recession is over.
  • Make sure that your liquidity position or financial position is sound enough.
  • Having an insurance plan is very helpful during the recession. Make sure that you have insured the life of each and every member of your family. When you are in need of money due to health problems you can claim the insurance.
  • If you are looking for a house then this might be a good time for the investment. The real estate which was experiencing an exponential growth in the preceding years is down now. The rates of homes have fallen to all time low perhaps this is the right time and you could be saving a lot of money now compared to if you had purchased the same property during the boom time.
  • Don’t ever think of taking a loan or borrow huge amount of money from the private lenders. We might be getting the money easily and quickly but what happens is that the interest rates that they charge is very high compared to the rates of other banks.

Investment during recession

Be it a boom period or financial crisis or depression or recession the investment is inevitable. The financial experts have opined that the person should and must be investing so as to ensure that he is financial stable and he must have more than one income streams. The plus point of having different streams of income particularly during the recession is that by chance you loose your job or there is a cut in your pay then the investments that you have made will continue to provide you with the same money inflow. Let us discuss some of the investments that are safe during the recession;

Investing in share market

Share market is the secondary market where the trading of the securities takes place. The investment in the share market is one of the safe investments that can be done provided you have the right knowledge of trading or you have someone who has that. That someone could be a broker or the financial planner who provides you this service too. You can invest in the shares and reap benefits. For example if you have a good broker who can evaluate the fluctuation in the prices of the shares then you can purchase the shares of a company whose prices have fallen down and sell them off once the prices rise. This is just one situation there are other situations too like purchasing debentures or preference shares or equity shares of a company which is performing well and then you will be getting the interest on the debentures or share of profits made.

See Also: How To Invest In Stock Market With Little Money?


Banks are the second avenues where we can invest during the recession. The banks offer various kinds of offers such as keeping the money in savings bank account or keeping the money as the fixed deposits or recurring deposits etc. Although the interest rates have come down but the returns are sure and the exact amount that you are going to get in the form of returns can be known at the time of investment.

  • Investment in the government backed securities is a good investment.
  • If you have the experience then you can go for lending your money this can be done provided you have a good knowledge and right contacts and the person to whom you are lending the money is credit worthy. Otherwise if you know any private lenders then you can contact them and ask for their assistance.
  • Post offices also have the facility of keeping the money as fixed amounts or recurring deposits etc. the returns on the investment are good and sure.

Tips for small business owners and micro-entrepreneurs

The suggestions given above apply for everyone now let us have a look at the suggestions for small business owners and micro-entrepreneurs

  • Diversify your portfolios. The diversification is very important in order to prevent huge losses which can happen if you invest in only one business. The entrepreneurs should not lay all the eggs in only one basket.
  • Investments or over capitalization in one area could prove dangerous. A good financial plan will definitely will be helpful in this regard.
  • Have an eye on the liquidity position don’t make any financial decisions as a result of which the water may start rising above the level.
  • Keep your money in the trusted banks not with any person or organization for that matter the nationalized banks are the safest ones.

The economic conditions that have an impact on the financial planning

Although the financial plans are not decided by the government and are done by the person concerned but the changes that occur in the economic conditions such as inflation, Budget, GDP Growth, variation in the interest rates have a profound effect on the financial plans.

GDP (Gross Domestic Product)

The Gross Domestic Product measures the monetary value of all the goods and services that are sold by a nation or an economy during a particular period. The GDP is the broadest gauge of the economic health of the nation. Although the GDP has no direct effect on the personal financial plan of a person but it is the indicator of the rise in the employment opportunities and the development of the economy of a particular nation or economy.

Interest rates

The interest is nothing but the cost of lending and borrowing. The extra amount that is earned or the difference between the borrowing rate and lending rate is the risk premium. The interest rates are very important in the financial plan because keeping the fixed deposits will be common in the each and everyone’s financial plan and they would be expecting particular amount in terms of returns but due to variation in the economic conditions there is a variation in the lending and borrowing rates. In the last year we have seen many changes made by the Reserve Bank of India in the interest rates in the REPO (the rate at which the Reserve Bank lends the money to other banks) and Reverse REPO (the rate at which other banks lend money to the Reserve Bank of India) and as a result of that there have been changes in the interest rates of loans, bank accounts, fixed deposits offered by the banks.

See Also: Different Interest Rates

All these above factors have been in the news in the past two years and have been affecting a common man since then. The present recession or economic downturn will go down in the books of history as one of the worst more worse compared to what was seen in the great depression 1930. It is must for each and everyone to have a good financial plan to tackle the recession and a good financial plan can be prepared with the help of a financial planner.

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