Write a one-page plan of what you will do, and what you will not do, when a downturn comes.
Take a single sheet of paper and a pen. Across the top, write "Recession playbook", and on the line below, write your household's name. Every decision your household should settle before a downturn goes on this sheet, and all of it has to fit on that one page.
When an engine fails, an airline pilot does not sit and reason out a response. The crew works through a checklist that other people wrote earlier, while they were calm. A household recession playbook does the same job for your family. It is a one-page plan you write today, telling your future self what to do and what to avoid once a downturn arrives and fear is driving decisions, and you put it together in four steps.
Kumar and Shalini, a couple with children, are the example at each step (an invented example; your figures and choices will differ from theirs). Kumar works at a plant in the chip-making industry.
A trigger is a specific event you can observe that tells you the plan is now live. Households without triggers tend to go one of two ways: they respond to every alarming headline, or they hold off until they are already in difficulty.
Base your triggers on what is happening in your own household and work, because the news has too much noise in it to steer by. Economic indicators, which Lesson 4.2, "Indicators to watch: GDP, hiring, inflation and the yield curve", deals with, tell you about the economy as a whole. A household trigger should tell you about your household. Events that work well as triggers include:
a retrenchment exercise in your team or department a cut to your basic pay or variable pay a hiring freeze across your industry a cut to your partner's income your company missing a payment or delaying salaries
Kumar and Shalini settled on three triggers, and the playbook goes live if any single one happens. The first is their plant announcing a hiring freeze or cutting overtime for more than two months in a row. The second is Kumar's performance bonus dropping by half or more. The third is either of them being told their role is at risk.
Divide your household spending into three groups: things you cut first, things you cut if the downturn deepens, and things you protect no matter what. Within the first two groups, decide the order the cuts happen in.
Start with cuts that are quick to make and cost you little: subscriptions, meals out, the next holiday, and any upgrade you have not yet committed to. The second round reaches further, into a smaller grocery bill, a cheaper phone plan and a pause on voluntary top-ups to your investments. Next to every cut, note roughly what it saves each month. Module 5 takes these numbers and works out how long your cash would last.
For Kumar and Shalini, round one means dropping the year-end holiday, two streaming subscriptions and most restaurant meals, which frees about S$700 a month. Round two pauses their monthly investment plan and trims the grocery bill, freeing another S$900.
The protected list is the spending you keep no matter what, and it deserves as much care as the cuts. Three kinds of spending go on it. Insurance premiums are one, and Lesson 4.4, "Money moves that make sense in a downturn, and ones that do not", sets out the reasons. Loan instalments are another, because a missed instalment costs far more than any cut would save. The third is essentials for dependants, for example school fees or support for parents. Kumar and Shalini's list holds every insurance premium, the mortgage, the children's enrichment classes and the S$400 a month they give Shalini's mother.
The investment rule is the section that keeps you from selling in a panic. Write it as one or two sentences stating exactly what you will do with your long-term investments when markets fall. It needs three parts: the action you will take, the action you will not take, and the only conditions that would make you change course. Word it tightly enough that you could not argue with it at two in the morning. A good rule makes no forecast about the market and names nothing to buy. It links your actions to your household's own cash position.
Kumar and Shalini wrote that they will not sell long-term investments because markets have fallen. They will stop new contributions only if trigger two or trigger three happens, and they will start again within three months of Kumar's income returning to normal. They will sell only if their cash buffer runs out, and in that case they will sell the investments they need soonest first.
The last step prepares for the worst case, which is needing a new job. List a few people outside your company you could approach about work, and the skills you would refresh first. Lesson 5.4, "Skills and contacts are your income insurance", goes further into both.
Kumar listed a former manager who now works at another chip maker, two classmates from his polytechnic course who are in the industry, and a recruiter who placed a colleague of his. At the top of his skills list is a data analysis course he had kept putting off.
With the four steps done, your page holds five short sections: triggers; cuts in order, each with its monthly saving; the protected list; the investment rule; and people and skills. Below them, add a line for every adult in the household to sign and date, then sign it. This can feel a bit theatrical, but it helps, since a plan with signatures on it is harder to abandon in a panic than a note on your phone. Store the page where you will find it when it matters. Kumar and Shalini printed theirs and filed it in the folder that holds their insurance policies.
Set aside an hour this week, with your partner if you share finances, and work through the four steps for your own household.
Write your one-page recession playbook, sign and date it, and keep it with your financial documents.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).