5 Steps to Protect Yourself Financially from any Potential Downside in 2023

Jan 20, 2023 / Reading Time: Approx. 8 mins

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As the alarm bells surrounding the global economy warn of a possible recession in 2023, India, as a member of the globalised world order, may not be able to escape the spillover effects completely.

Although the domestic picture may appear to be promising, but the distant rumblings are becoming louder. A contraction in economic activity usually brings discontent, such as job loss, salary cuts, fewer employment opportunities as the economy tightens, and intensified market volatility. Portfolios shrink in value as markets recede and businesses struggle to stay afloat; while expenses keep piling up.

Making ends meet is difficult for many households, let alone saving for future goals. Memories of the severe financial hardships faced amidst the pandemic in 2020 and 2021 are still fresh in readers' minds. Nobody knows how long the next downturn will endure. However, you must learn from previous experiences and put specific safeguards in place to prepare for any eventuality, which may include recessions or periods of an economic slump. You must take a good control of your finances and plan your investments smartly in order to maintain your financial well-being.


You see, navigating through such economic turbulence is easier if you have laid the groundwork and created a financial cushion ahead of time. This effort will look different for everyone depending on your overall financial picture, but here are some key steps to help you bulletproof your finances ahead of a rocky 2023.

1. Build an emergency fund

An emergency fund is a crucial part of creating a financial cushion to sustain during unforeseen events. During an economic downturn, the likelihood of retrenchment or salary reduction is very high, putting your finances under tremendous strain if you do not have an adequate cushion.

A contingency fund will cover regular expenses until you find another job or a steady source of income. An emergency fund should, ideally, cover your household expenses for at least 12-24 months, including loan EMIs. If you do not already have this financial buffer or are falling short, there is still time to increase your corpus.

Maintain an emergency fund by setting aside cash or short-term investments. Start by putting aside any surplus into a bank deposit or short-duration debt funds; you may invest an SIP/lumpsum in liquid funds. Over the next few months, gradually expand the corpus. However, those working in high-risk sectors with volatile income, prone to sudden layoffs and salary cuts, should start saving for an emergency fund as early as possible. Taking these initial steps can give you a solid foundation to continue saving.

2. Fine-tune your spendings

Take a look at your spending and saving habits to see if you can make any adjustments. Above all, pause before making any major financial decisions.

While the economy is uncertain, it is prudent to reduce discretionary expenditure and have a more conservative budget. You can track and manage your cashflows by downloading a budgeting app. Examine your bank statements as part of the process to identify areas where you can make cuts or pause expenses, even for the short term.

Remember, "A penny saved is a penny earned."

If you are in a tight spot financially, start with simple lifestyle changes. Reduce your weekend excursions and regular fine-dining outings. Save the update to the latest flagship smartphone for a later date. Your first objective should be to maintain your household budget lean. Cutting costs such as streaming subscriptions can result in tiny but significant savings. Money saved as a result of this effort can be utilised to boost emergency savings.

5 Steps to Protect Yourself Financially from any Potential Downside in 2023
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3. Pay off your expensive debt-burden

A downturn can weigh particularly heavy on those with a hefty debt burden. Borrowing is a tool that can be used wisely for buying a house/car, an education loan, etc. Debt is not bad, but carrying high-interest debt is never a good idea.

High-interest consumer debt is generally more damaging to financial stability and wealth. In any uncertain economy or market, reducing high-interest consumer debt, particularly credit cards, is an essential best practice. There are numerous approaches to dealing with high-interest debt, including the well-known snowball method, which focuses on paying off your smaller bills first. The avalanche method, on the other hand, prioritises paying off your highest-interest loans first.

However, do not panic and dip into your savings in an attempt to close outstanding loans. You may consider cutting down on unnecessary expenses and using the surplus to pay off your significant debts. Ensure to maintain a debt-to-income ratio of 40% or below.

4. Follow a suitable asset allocation and diversify your portfolio

For much of 2022, the stock market was on a rollercoaster ride, and market volatility is expected to continue in the following year. While this can be upsetting, the goal is to remain diversified and to think long-term while investing, especially during a downturn.

During a market turmoil, investors are more likely to take rash investment decisions if they are not pursuing a clearly defined framework. Do not panic, and avoid market noise; otherwise, one may end up liquidating investments, jeopardising long-term goals. It's important to stay put with your investments and let your money continue to grow over time.

Consider diversifying your portfolio with correct asset mix to reduce risk. While doing asset allocation, it is important to understand that each asset class has its own set of performance cycles and level of risk reward. Nobody can foresee which of these assets, which include equity, debt, and gold, will perform well.

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As seen in the pyramid above, your investments should have a tactical allocation across asset classes and market capitalization. As a result, it provides your portfolio with the required stability and the potential to generate better risk-adjusted returns. When your portfolio is sufficiently diversified, it is protected against the underperformance of a few investments while benefiting from those that are performing well at the moment. PersonalFN's SMART Fund Explorer can help you pick suitable funds to diversify your mutual fund investments.

Given the market volatility, economic uncertainties and the possible risk of recession, it will be prudent to review your investment portfolio at the beginning of 2023 to hedge against any possible downturn. I recommend 'PersonalFN's Mutual Fund Portfolio Review' service, which is a personalised portfolio review service designed to boost the returns of mutual fund investors by reviewing and streamlining their existing mutual fund portfolio.

5. Establish a side hustle (additional income)

In addition to all of the steps already outlined, you can also safeguard yourself financially by taking on a side hustle so that you are not dependent on just one source of income. If job insecurity weighs heavily, this alternate source of income can help in the event of a sudden layoff.

This additional source of income can even help build that emergency corpus without having to lock savings from your primary income. It can also help to create a surplus to pay off your existing debt burden. If you have the bandwidth, consider a way to bring in extra income to sustain in times of need. In an age of remote working, it is feasible to find the time to take on additional jobs and side hustles from home.

Apart from this, make sure you have comprehensive insurance coverage for yourself and your immediate family, independent of the group medical insurance provided by your employer. You don't want to find yourself paying costly medical bills in times of economic downturn.

To conclude...

The beginning of the year is an ideal time to review your overall financial picture and create a financial cushion to protect your financial stability from the upcoming challenges in 2023. The silver side is that this economic downturn will certainly bring inflation under control, and inflation indicators are already signalling that it may finally be turning a corner. However, with a possible recession looming in 2023, the time to prepare financially is now. 

MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.

She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.

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