By Nick Gardner | September 01, 2008

Take steps to make sure you could survive if you lost your job
Work out a budget and build up an emergency fund

BATTEN down the hatches. Australia could be heading for recession and that means tough times ahead.

The Reserve Bank (RBA) is forecasting 100,000 jobs to vanish in Australia in the next 12 months, taking unemployment to more than five per cent.

New South Wales is set to be hard hit because it relies on “service” sectors, such as retail and financial services, which traditionally get hammered in a recession. States like Queensland and Western Australia have mining to help prop up the finances.

Savanth Sebastian, Commsec economist, says: “The worst-affected will be Victoria and NSW, where there are big retail sectors. We recently saw the worst retail sales data in 12 years and it’s the country’s biggest employer, so it doesn’t look good.

Plan ahead: Work out a personal budget
Rainy day: Put aside an emergency savings fund”The RBA’s goal was to slow the economy gently, but with data looking so bleak, it looks like we could be heading for a hard landing — particularly in retail which, with two quarters of negative growth behind it, is already technically in recession.”

If the worst should happen and you lose your job, it is important to choose the right redundancy package.

Paul Bilson, of Woodwood Nhill Financial Planning, said: “See a planner, as the tax differences in the choices can be significant. The maximum tax-free portion of any redundancy payout is $7350, plus $3676 for each completed year of service. So, if you had 10 years of service, you’d be entitled to $44,110 tax-free. Anything above that would be taxable.”

By placing redundancy funds into superannuation, you may save tax; but, if you are under 55, you cannot access the funds, which is obviously not ideal if you will need the money for shorter-term purposes, such as mortgage repayments.

It is advisable to keep money free until you have found another job. Remember, however, that you may be entitled to extra payments in the redundancy package, such as long service leave and holidays.

Mr Bilson says: “A good place to hold the funds is in the redraw facility of your home loan. It is decreasing the term of the loan and saving you interest, while still being accessible as needed”.

If you are approaching retirement, superannuation may become accessible, which may help to meet income needs. But some staff super plans will not allow you to keep the super with the company once you leave, so you may have to roll it over into another fund or the company super fund might send it to a different fund — and that means you could lose any insurance you have through the existing super scheme.

You might also be entitled to Centrelink benefits, but there is usually a waiting period, which is assessed on how much holiday you are entitled to.

So, if the storm clouds are gathering, what can you do to protect yourself?

Here we run through some handy tips for coping with an economic slowdown.

Build an emergency fund

The most essential weapon in your armoury against hard times. Start saving. Even a few bucks a month into a savings account will mount up surprisingly quickly. Set up a direct debit from your transaction account so its taken straight from your take-home pay each month and hopefully you will not notice it too much.

Pay off high interest debts

Credit cards and personal loans are an expensive liability, with rates averaging almost 20 per cent. If you cannot afford to clear the debt, switch to a card with a lower rate of interest.

Some cards have zero per cent balance transfer deals and you can often switch from card to card for a long period, extending the time you pay no interest, which in turn makes your repayments go further. Try and clear the card in this time.

Also, try asking your bank for a lower rate. You would be surprised at how often this works. Or, when you apply for a zero-rate card from another bank, ask your own bank to match or beat the zero per cent period. When they realise you are serious about leaving, they listen — and they’re often prepared to bargain.

Set a budget

By noting down your income and outgoings each month, it is much easier to see areas where you could cut back and use that money to pay down your debts.

Get insurance through super

While you might not be able to insure your mortgage repayments against losing your job, you can — and should — protect them against accident or sickness preventing you from working.

And while there are policies available on the open market, there are often policies available through your super fund at a significantly reduced price.

Check with your super fund manager for details and switch policies, if necessary, to get insurance.

Reduce your mortgage

This is most people’s biggest expense and biggest worry.

If you can build up a fund — maybe an offset account against the mortgage — it can buy you valuable time, allowing you to take “payment holidays” and skip a few months’ payments, until you get back on your feet.

It’s a crucial buffer to build into your finances. In addition, any money you have set against your mortgage is earning the best rate of interest, tax-free.

That’s because you are saving interest on the offset account balance at the same rate as the mortgage rate. Based on a rate of 9.5 per cent, that is equivalent to a gross return of about 12 per cent for a basic rate taxpayer.

Don’t buy whitegoods

It’s s classic pre-recession advice. Don’t go buying big consumer items because, when the economic downturn hits — as it already is — retailers become more desperate for business and are prepared to bargain.

But you have to be brave, throw aside any coyness and be prepared to ask for daring discounts.

If you don’t get what you want, shop around. Remember, retailers of all kinds have big margins to play with, so the right shop will give you a big discount. Playing one off against the other is a good tactic.

Sell your property

If  you’re looking to move, but have been holding out for a better price, be realistic and take a reasonable offer and move on.

Property prices never fare well in economic downturns because fewer people can afford the costs involved in moving and decorating.

Property prices have already shown signs that they are moving downwards and have been edging down in southern and western Sydney for some time. But the pace and scale of the falls will be much more severe, the worse the downturn becomes.

Across Sydney, prices are just about holding up, but experts say prices could fall by an average of 10 per cent or more in the next year, with the most bearish pundits predicting property price falls of 30 per cent, if recession bites.

So move now and make the most of cheaper furniture and whitegoods in the shops next year.