Kavan Choksi Talks About How to Manage Money During a Recession

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A recession is when the economy takes a hit and declines owing to reduced industrial activity and trading. Kavan Choksi points out that recessions cause unemployment, negative GDP, as well as reduced retail sales and manufacturing activities. There are a variety of macroeconomic factors, starting from a sudden economic shock and too much household debt to considerable inflation or deflation, which can cause a recession.

Kavan Choksi mentions a few pointers that can help manage money during a recession

Even though they are temporary, recessions are likely to cause financial loss for households. Hence, when a recession hits, people must be careful with their finances. Financial planning is important for strategizing investments and planning for financial goals in an effective manner, especially in challenging times like a recession.

Here are a few tips that can help people to manage money during a recession:

Reassess expenses and increase savings: One firstly needs to take a closer look at their spending habits, and develop a plan for increasing how much they save. Building an emergency fund would help people to stay prepared for tacking future expenses that are not already a part of their monthly budget. These expenses can include unplanned costs due to a shortage of cash or unexpected events like an increase in food or gas prices. People should typically try to have an emergency fund of six months that can assist them in facing potential financial hardships.
Invest in things that increase in value over time: During recessions, people who have access to more cash would be in a better position to take advantage of investment opportunities that can elevate their finances for the long-term. As one increases their cash reserves, they therefore should consider investing in assets like real estate or stock, which would pay off in the long term. The key is to invest with a 10-year outlook. During a recession, one would have access to more assets for less money. As it is common to see the stock market declining during economic downturns, one would get the chance to purchase shares of good companies at a discounted price.
Diversify the investments: Seeing that the price of a certain stock is down and then opting to put all the funds into that stock would be fairly risky. Hence, for newbie investors, investing in an index fund; a mutual or exchange-traded fund that tracks a market index such as the S&P 500 or Total Stock Market Index, would be a good idea. Index funds facilitate passive management and diversification, which most investors want in their portfolios.

Kavan Choksi mentions that people should also try their best to leverage tax advantages during a recession. There are a number of tax advantages available when investing in assets like real estate. People may even choose to invest in retirement accounts that offer tax benefits, like a 401k, 403B, 457. The contributions for these accounts are deducted from the income of a person to calculate how much they need to pay in taxes. In other accounts, like a Roth IRA and Roth 401k, the investments grow tax-free until retirement.