If you keep an eye on the financial headlines, you’ll likely see the same dirty word come up over and over again: recession.
Analysts at government-backed mortgage company Fannie Mae recently predicted the economy would slide into recession in the second half of next year. Goldman Sachs economists say there is a 35% chance of a recession in the next two years. Ordinary people are even more worried, with 81% of Americans saying they think the economy is heading for a recession in 2022 in a recent CNBC + Acorns Invest in You survey, conducted by Momentive.
It makes sense that some analysts and investors would feel a bit worried. A recession is an economic downturn typically defined by two consecutive quarters of negative growth in gross domestic product, which is the sum of the value of all goods and services produced. And these days, in order to fight high inflation, the Federal Reserve is raising interest rates and implementing monetary policies designed to, well, slow down the economy.
And if an economic downturn occurs, things usually don’t go well for the people on the ground. “Usually when you think of recessions, four things happen,” says Bob Bacarella, founder of Monetta Financial Services. “Normally you have high unemployment, falling wages, falling house prices and stock market declines. We’re not really there yet.”
Even so, it’s wise to make sure you’re prepared. There are some smart steps you can take that can benefit your finances now and help you stay on track during tough economic times.
While these typically involve financial moves, the most important part of your preparation can be mental, says Chris Maxey, chief market strategist for Wealthspire Advisors.
“Don’t panic. Don’t worry too much about the notion of a recession,” he says. “We realize this is a scary result, but it’s all part of the natural ebb and flow of the economy.”
Here’s how experts recommend “recession-proofing your finances.”
Pay off high interest debt
For many Americans, the word recession conjures up memories of the global financial crisis that began in 2007. One of the many issues that triggered that crisis, Maxey points out, was debt. “There was so much leverage. Not only from the corporate side, but also at the consumer level where people were going into debt to buy two or three houses.”
When the economy crashes, if you’re heavily in debt, you could struggle, Maxey points out. “If you think a recession is on the horizon, document those types of expenses that don’t add to your personal balance sheet,” he says. “If you have high-interest debt, like credit card debt, that’s something you’ll want to pay off now.”
This is particularly important, he adds, as the Fed has signaled its intention to raise interest rates in the coming months. “These rates are going to skyrocket, and the cost of credit card debt is going to be very expensive.”
Build your emergency savings
Even in the best economic times, building an emergency fund is a good idea, say financial experts. But given the rising costs of everyday expenses like food and gas, it would be especially smart to bolster your cash reserves if you think an economic downturn is on the horizon, says Karen Heider, advisor Principal in Wealth Management at Concenture Wealth Management. “You want to have emergency savings in the bank and ready to go,” she says. “Generally you want three to six months of expenses, but it’s not a bad idea to have a little more than that given that we expect things to cost more.”
Three to six months of spending can seem like a daunting number, which is why many financial experts recommend starting by aiming for a smaller, more achievable savings goal. Assuming you receive 26 paychecks per year, you would need to save $38 per check to have $1,000 in reserve a year from now. That would put you ahead of about 56% of Americans who say they couldn’t cover a $1,000 expense without going into debt, according to a recent Bankrate poll.
Video by Stephen Parkhurst
Consolidate your income
Right now, you might not feel like a job loss is something you need to prepare for, Maxey says. “Jobs are plentiful enough in all sectors. If someone lost a job today, you would have no trouble finding a new one. This is true for low-wage and high-wage workers.”
Still, a slight uptick in unemployment is a classic feature of recessions, and it pays to make sure you’ll keep having money when the economy slows, Heider says. “When recessions hit, companies may have to lay off people to shore up their balance sheets,” she says. “Making sure you’re as indispensable as possible is key.”
Video by Mariam Abdallah
What that means, she says, will vary by industry, but in general it can only help your chances if you strive to be the “model employee” at your company. But even that may not guarantee your job security. “You’ll also want your resume polished and ready to go,” she says.
Taking a side hustle can provide you with a bit of a safety net, adds Heider. “If you have a special talent or want to get into a side hustle, now is the perfect time to do it,” she says. “If you lose that job, having income streams from multiple sources will be a huge plus for you.”
Diversify your investments
No one knows exactly what form the next recession will take. But for those trying to get a sense of how their finances might be affected, it’s helpful to look back at historical trends, says Brent Ford, founder of Benefit Wealth Partners. “If you look at four of the last five recessions, the average stock market decline was about 30%,” he says. “I think that’s a pretty good expectation of what this recession will be like if we hit one.”
And after every recession so far, the economy has rebounded and the market has reached new highs, Heider points out. “The market might get a little crazy. Don’t panic and make an emotional decision that can hurt you,” she says. “Recessions are common. They happen, we go through them, we go to the other side and we keep going.”
Video by Stephen Parkhurst
Big losses in your portfolio can cause many investors to sell to avoid further losses, but that’s exactly the kind of behavior financial professionals warn against. “When things go down, for the long-term investor, it’s actually a buying opportunity,” Heider says. “You should profit when stock prices are cheaper to buy because you can hold onto them for the long term coming out of the recession.”
The best way to prevent yourself from panicking and selling when the going gets tough: Build a portfolio with a wide variety of investments that behave differently when the markets go down. “The best way to defend yourself is to switch to a diversified portfolio,” says Bacarella. “The overall market can be down 8% in one day, but an individual stock you own can be cut in half. Diversification gives you a cushion during a downtrend.”
The opinions expressed are general and may not be suitable for all investors. The information in this article should not be construed as, and may not be used in connection with, an offer to sell or the solicitation of an offer to buy or hold any interest in any security or product. ‘investment. There is no guarantee that past performance will recur or result in a positive outcome. Consider your financial situation carefully, including investment objective, time horizon, risk tolerance and fees before making any investment decisions. No amount of diversification or asset allocation can assure profits or guarantee against losses.
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