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The second step you should take to prepare for a 2020 recession

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The last time Australia saw a (textbook) recession was in 1991! Unfortunately, we are likely to have a recession in 2020.

In my previous article, I covered off on step 1 to prepare for a recession: building an emergency fund. An emergency fund will help you meet your necessities for a few months, allowing you to hold your stocks through tough times. I strongly recommend reading this article to see just how powerful an emergency fund can be!

Today’s article looks at the second step ASX investors should take to prepare for a recession: reviewing your finances.

Doing a budget

Preparing a budget may seem like personal finance 101, but the foundations are often the most important. Understanding your required and discretionary spending will give you an idea of what you are doing well and what you could improve on.

Budgeting will also allow you to see how long you could go on without a paycheck and how much you could average into quality ASX shares like CSL Limited (ASX: CSL) and my top pick for April, Xero Limited (ASX: XRO).

My tips for budgeting are to remember the annual expenses (and when they’re due) and be disciplined in categorising expenses. 

Reviewing your debts

Most people’s biggest debt is their home mortgage. Thus, a few basis points change in your interest rate can go a long way to relieving financial stress. Interest rates have been dropping to record lows in response to COVID-19. So, now is a great time to contact your bank manager or finance broker.

High-interest debt like credit cards should also be a focus. Both repaying it or reducing your interest rate where possible.

A bonus to starting with your private debt is that it’s non-deductible for tax, meaning you see the direct benefit of each dollar saved.

Preparing your taxes

Each year your tax return is likely to look different to the last. You may have sold some shares, received a trust distribution or business conditions have changed. COVID-19 has already had an impact on both employees and business income.

As a result, speaking to your accountant is even more important. Those in the Pay As You Go (PAYG) instalment system may be able to vary their March and June instalments to reflect their changing income for FY20. Additionally, the government’s stimulus package should have something to assist you if you have been severely impacted by COVID-19.

Looking forward to 30 June, getting your house in order and preparing your taxes as early as possible will let you or your accountant know your potential year-end refund or payable. From there, you can then decide whether you want to lodge now or wait. 

Tomorrow, be sure to check out my third and final article for a tip on taxes!

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Lloyd Prout owns shares in Xero Limited and expresses his own opinions. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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