Although economists continue to refuse to use R-word, there are warning signs that the economy may be in technical recession. Inflation is rising despite four Federal Reserve interest rate hikes.
A rise in layoffs, another indicator of recession, is also evident across the country. Many companies, especially in the tech sector have announced layoffs in the recent months. Ask most people and they will tell you that it is becoming increasingly difficult to make ends meet. According to at least one June poll, 58% of Americans believe that we are currently in recession.
Others point out key factors that point in the other direction, such as low unemployment, rising spending, and a healthy bank sector.
Although the National Bureau of Economic Research calls a recession, and it has so far remained tight-lipped about the matter, the question of whether this difficult financial period is a recession seems to be a subjective matter of interpretation.
This article is committed to helping you with your financial health by providing accurate, timely, and honest advice that addresses the most pressing financial issues of our time.
Let’s take a look at the economy
The United States has experienced a number of economic setbacks since the Great Depression. These range from a few months up to over a full year. There is always a recession in sight. Economies are cyclical with upswings, downturns. It’s impossible to predict what will happen, and we sometimes can’t even see what’s happening as we are there. Morgan Housel, author of The Psychology of Money may have put it best when he tweeted in April: “We are definitely heading towards a recession. Only thing that is uncertain is the policy response, timing, location, duration, and magnitude.”
It is difficult to predict the future. Anybody who claims otherwise is most likely trying to sell something. We can only draw from history and be more proactive about money decisions we can make. It is important to resist panicking. You can do this by reviewing the history of previous recessions, and looking at your financial goals to determine which levers you should pull to keep on track.
These are eight steps that you can take in order to increase financial stability and resilience during a volatile economy.
1. Plan more, panic less
Current recession forecasts are only predictions. You still have time to put together a plan, even if you’re facing the economic slowdown. Review your financial plan over the next few months and create worst-case scenarios.
Consider these questions: What would your plan be if you lost your job in the future? What can you do to prepare your finances for a layoff? You can find similar advice in the following article.
2. Increase your cash reserves
Cash in the bank is a key factor to getting through a recession without being hurt. This was evident in the steep 10% unemployment rate that occurred during the Great Recession of 2009. It took average eight to nine months for people affected to get on their feet. People who had strong emergency funds were able to pay their housing costs and purchase time to plan the next steps.
Retool your budget to put more money into savings to reach the recommended six-to nine-month reserve. While it may seem sensible to cancel recurring subscriptions, a better strategy is to call billers (from cable companies to utility companies to car insurance) to ask for discounts or promotions. Talk to customer retention departments specifically to find out what discounts and promotions they may be able to offer to prevent you canceling your subscriptions.
3. Look for a second source of income
Searches for “side hustles” on the internet are very popular. However, this is especially true now as many people look to diversify their income streams ahead of a possible recession. Diversifying income streams is a good way to diversify investments and reduce income volatility associated with job loss.
4. Refrain from making impulsive investments
After all the negative news about the stock market this year, it’s difficult to not worry about your portfolio. If you have more years to retirement than 10, 15, or even 20 years, it is better to stay with the market’s ups and downs. Fidelity found that those who invested in target-date funds (e.g. mutual funds or ETFs) during the 2008 to 2009 financial crisis had higher accounts balances than those who cut back or stopped contributing. Linda Davis Taylor, an experienced investment professional and author of The Business of Family, said that panicking and selling ‘at the top’ can lead to losses that can be very difficult to recover.
You should definitely talk to your broker or portfolio manager about automatic rebalancing. This feature will ensure your instruments are properly weighted and in line with your investment goals and risk tolerance, regardless of market swings.
5. Lock in interest rates now
Inflation levels will drop as policymakers raise interest rates. Interest rates will rise. Anyone with an adjustable rate loan could be in for some bad news. This is also problematic for people who have a credit card balance.
Federal student loan borrowers do not have to worry about rates rising, but private variable rate loan borrowers may be interested in refinancing or consolidating options with an existing lender, or other banks like SoFi. This could consolidate the debt and make it one fixed-rate loan. Your monthly payments will not increase unpredictably if the Federal Reserve raises interest rate this year.
6. Credit score protection
Recessions can make it more difficult for borrowers to get credit, because banks have stricter lending guidelines and interest rates. A strong credit score of 700 or more is required to be eligible for the best rates and terms. You can typically check your credit score for free through your existing bank or lender, and you can also receive free weekly credit reports from each of the three main credit bureaus through the end of the year from AnnualCreditReport.com.
You can improve your credit score by paying off high balances. Also, you should review and dispute any errors on your credit report.
7. Rethink purchasing a home
Although home prices may have dropped in certain areas, there are still plenty of homes available. Renting for a bit longer is an option if rising mortgage rates are putting more pressure on your ability to purchase a home within your budget. You should also consider renting if you are concerned about your job security in the event of a recession. Although leasing isn’t affordable at the moment it offers more flexibility and mobility. Renting can help you stay more liquid in a difficult economy, as it doesn’t require you to save money for closing costs and a down payment.
8. Take good care of your valuables
This advice, which was born from the high inflation of the late 1970s, still applies today: “If it isn’t broken don’t fix.”
Many people face delays and high prices when purchasing new cars, tech products and furniture. You can also get replacement parts. Sign up if a product comes with free warranty. It may be worthwhile to pay a small fee to get insurance extended during times of rising prices.
My car, for example, has been in the shop waiting for parts from overseas for more than three months. In addition to my monthly car payment, I also have to pay a rental car fee. It’s getting expensive. I will be a safer driver in a recession.