The present recession has given me fresh perspectives about how people react to a financial crisis. It has also taught me plenty about how people react to financial crisis and opportunity.

In this article, I would like to list down the 3 money steps all of us can do to prepare for the next crisis.

1. Set Up Your Emergency Funds PROPERLY

One very common but alarming observation is how thin most peoples' emergency funds is. While most people have about 3 months of expenses set aside, in my opinion, it's too thin. Think COVID-19 and you certainly won't be expecting to find a new job in 3 months. Also, I think that most people follow the standard guidelines too literally. What this means is, most financial literature suggest 3-6 months of expenses covered and a lot of people literally only have their emergency funds in their bank balances. This means that every small unexpected event would mean touching the emergency funds. This is highly uncomfortable for me because it means that people are spending in a way they have literally no surpluses.

This is why I advice setting aside 6 months of salary as your emergency funds. At the very least, if your expenditure is not 100% of your income, you have room for a longer down time if required. Also, it sets you up to ensure that you have a REAL emergency fund really set aside when you overspend.

You can find this wealth framework on my webpage under the section Building Wealth. It is a very generic guide however I think if you are learning to manage your own money, this guide can help you start your financial journey on the right foot.

2. Build multiple income streams

So a recession makes many people feel vulnerable because most of us only have 1 stream of income. This is why even when some individuals are working in sectors unaffected by the recession (like essential services), you can see signs of a more conservative approach to opportunities. A recession is really a time where people who are prepared make significant strides in their wealth accumulation goals. This is in theory. In real life, if we only have 1 income stream, most people will naturally become more cautious in their spending regardless of how stable their job appears. Only when we have more than one source of income would we feel more secured to take maximum advantage of opportunities during a downturn because we know that we still have money coming in even when we lose our jobs.

So how do we create multiple streams of income?

I'd like to start by saying that most income streams take time to build. In other words, you need to invest either money, time or both at the start in order to reap the fruits later. For example, I recently spoke with a Youtuber and he shared that his income from Youtube are mainly from his 2017, 2018 videos, not the ones he uploaded recently. Essentially, a following and traction takes time to build.

Side Hustles

If you are open to rolling up your sleeves and work, here are some ideas you can get started on.

Nowadays with technology, your outreach and leverage is unlike before. A sufficiently enterprising individual can create content anywhere and become the next Jian Hao or Nas Daily. The recent stay home period for many around the world have also helped most of us to embrace video conferencing. You can teach anything you are good at online and reach out to many individuals sometimes, even when you are sleeping. One of my trading mentors whom I learnt trading from used to conduct classroom lessons. Now, his lessons are recorded and you watch it over and over again. This has allowed him to reach a more global audience and also earn money even when he is asleep.

Investing

Alternatively, if you do not have time for a second hustle because your day job is too time consuming, you can always use money to earn more money. There are loads of available avenues such as dividend investing, rental income from property, even partially guaranteed income paid out through annuities.

One question I always get from clients is which is the best? There's no best. There's only the most suitable. Take for instance, if you only have a lump sum that is just enough to down-pay a property, are you comfortable to put everything in it? What if you can't find a tenant? On the other hand, there are individuals who are comfortable enough to transact properties online without even viewing the physical location first. Likewise, most dividend generating instruments always come with the possibility of losses. A good example in Singapore context is Hyflux. If you are someone who cannot even stomach a little drop in value, then maybe this option may not be suitable. Of course, if you enjoy doing research and shopping for financial instruments, then by all means give it a go. Similarly, a person expecting high yields might not like annuities that much because it's a wealth preservation tool. The yields paid out by annuities on a regular basis is unlikely to exceed 3-4%. It is very suitable for people who likes predictability, low risk and also a hedge against market uncertainty. Having said that, modern day annuities can come with premium financing offering a very interesting twist to people seeking high yields. Often with a financing facility, yields can reach 6% or more.

3. Learn how to invest

All financial crisis is an opportunity to transfer wealth from the unprepared to the prepared. During this COVID-19 crisis, we have seen markets tank 30%. In the previous 2008 Lehmann Crisis, markets grew an astounding 300%++. Given the rhetoric that COVID-19 is a worse crisis, the rebound might be far more astounding if markets were to crash further.

It doesn't take much financial knowledge to understand the term, 'buy low sell high'. In other words, most people whether they have invested before or not knows that a market downturn is a good time to enter the market. Yet, why isn't everyone rushing to buy? This is partially because not everyone has excess funds and partly because not everyone knows how to invest so they are scared. In reality though, a market crisis is actually one of the best times to start investing because the risk is lowered. Historically in recessions, most major markets drop by around 50%-60%. So if you think about it, would you prefer to enter the market when it's going up a couple of years after a recession where the risk exposure might be more than 50%-60% or during a crisis where markets have dropped by a certain percentage and are closer to a bottom?

Other than the risk aspect, another reason why invest now is because a recession is a good time to learn. Personally, I was waiting for this recession for a number of years now. So when markets crashed I was excited. However, because this is my first downturn since I started working, I can get into a decision paralysis trying to decide which investing strategy to adopt. When you have surplus funds, your problem becomes should I invest 50% of my funds when markets drop x%, should I wait longer or should I invest my entire warchest? Only when you have money invested and ride through the process will you learn and make smarter decisions when the next crisis comes.

If you don't have money to try it out now, there are a lot of demo trading accounts where you can play with monopoly money to get a feel of investing. Of course, if you are clueless where to start, you can either self learn through free content online, attend a course or work with an advisor to walk you through the process.

Summary

To sum things up, we pretty much can only take action during this crisis if we have the resources available. What almost everyone can do however, is to prepare for the next crisis. To do so, we simply need to take action and get ready through the 3 money steps:

1. Set up an emergency fund properly

2. Build more than one income stream

3. Learn to invest

If you would like to be hand-held through this process of getting started, please speak to a trusted advisor. You can drop me a message if you would like me to help you with it.

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Disclaimer: The content created are based on my personal opinions and may not be representative to everyone or any organisation. If you have any doubts or queries pertaining to insurance or investment, please seek professional advice from a trusted adviser in an official setting. You may also reach out to me if you do not have a present adviser using the message box under 'Let's Talk'.