10 Ways to Prepare for an Upcoming Recession
Continuing high inflation and ever-rising rates are continuing to stoke fears of a recession in the U.S. economy in the coming months. While there’s nothing you can do to stop a recession from happening, there are things you can do to protect your finances if a slowdown does occur.
BATTEN YOUR HATCHES: HOW TO PREPARE FOR A RECESSION
Maybe you’re young enough not to have dealt with previous recessions, or perhaps you were simply caught off guard last time the economy stumbled. Either way, we could all use some help understanding how to prepare for a recession.
Below we take a look at what a recession is and how it might affect you. We also offer 10 specific things you can do to waterproof your finances against potential rough weather ahead. Read on to learn more!
WHAT IS A RECESSION?
A recession occurs when economic activity in a country or region declines. It means economic growth has stalled or even fallen in the economy as a whole. Recessions are typically marked by rising job losses, falling investment, and lower spending by companies and individuals.
Many people remain concerned that the U.S. economy is heading for a recession caused by persistently high inflation rates, sharply increasing interest rates, and supply chain disruptions.
HOW LONG DO RECESSIONS LAST?
Economists often define a recession as two or more quarters of falling productivity. By this measure, a recession cannot be shorter than six months. In practice, economic slowdowns can last as little as two months or persist for many years, depending on their exact causes.
The good news is that the average length of a recession in the U.S. since 1945 has been just 10 months before economic growth has resumed.
HOW WILL A RECESSION AFFECT ME?
That said, even a short recession can have a dramatic effect on your earnings, savings, and economic prospects. Job losses typically increase sharply before and during recessions, and specific sectors can see far worse unemployment than the overall economy.
Even if you retain your job during a recession, you might not see your wages or salary grow and, in serious slowdowns, your paycheck might even decrease. You might also miss out on opportunities as governments and companies cut back on spending and new investments.
In addition, the lower growth and the higher inflation that can trigger a recession mean that your savings and investments might not increase in value or earn as much interest as before.
Lastly, if you took out a new mortgage, auto loan, or credit card with a fixed rate just before a recession—you could end up paying more in interest, since rates usually decline during these extended economic downturns.
HOW SHOULD I PREPARE FOR A RECESSION?
While the security of your job and paycheck and factors such as interest rates are largely out of your hands during an economic slowdown, there are sensible things you can do to prepare for a potential loss of income and to protect the long-term value of your savings and investments.
1. REVIEW YOUR BUDGET
If you have a monthly budget, this might be a good time to review how much you are spending and where. Cutting back on unnecessary spending now will make it easier to adjust if you lose income, while the money you save now will provide additional security if your income falls.
2. REDUCE HIGH-INTEREST DEBT
High-interest rate borrowings like credit card debt can be a double whammy during a recession. You will still need to continue to pay down what you owe even if you lose your job or your income declines. You could also see your interest rate spike as economic conditions worsen.
Reducing higher-interest debt is a smart move in any economic climate, but it’s an especially sensible thing to do to protect yourself from the worst effects of a recession.
3. AVOID LARGE PURCHASES
Similarly, avoiding or postponing large purchases like a home or car can help prevent you from getting in over your head with debt payments in the event of a recession or being stuck with a property or major asset that is suddenly worth less than it was just a few months earlier.
4. CREATE OR INCREASE YOUR EMERGENCY FUND
Having extra cash on hand could be critical if you lose a job or your earnings decrease as a result of a recession. Even in good times, many financial experts recommend having the equivalent of at least three months’ typical expenditure set aside in case of emergency.
Now might be a good time to start setting money aside or to increase your nest egg. Having money to live off of can help you survive a financial setback while protecting your long-term savings and preventing you from going into debt.
5. CHOOSE SAFER INVESTMENTS
Investments in uninsured stocks or mutual funds can be a serious liability during a recession. Growth and returns on even the highest-quality stocks can fall sharply and businesses and even banks themselves may fail.
In times like these, it can be wise to keep your money in an insured investment like a money market account.
Why? Because money market funds pay more interest than standard checking or savings accounts but are insured by the federal government through the FDIC or NCUA in exactly the same way as these standard deposit accounts are.
This means you will earn more in interest but will also get your money back (up to $250,000 per account) in the rare event your bank or credit union collapses.
6. PROTECT AGAINST INFLATION
In some recessions, interest rates can stay stubbornly high even as economic growth stagnates. In these cases, it’s important to protect the value of your savings and investments by maximizing the interest you earn.
Share certificates issued by credit unions offer fixed, guaranteed returns over an agreed investment period with full federal deposit insurance. While interest rates are similar to those on money market accounts, by reinvesting funds and earning dividends over time, you can build a significant amount with almost no risk.
7. DIVERSIFY YOUR PORTFOLIO
If you choose to keep money in direct investments like stocks or mutual funds when a recession is looming, it’s more important than ever to diversify your portfolio properly. Diversification means making sure your money is invested across different types of assets.
Diversification protects you in the event that one type of investment is hit particularly badly by a recession. Recession-proofing your investment portfolio can be a good time to explore different types of assets, including private and government bonds, property trusts, and even just cash.
8. OPTIMIZE TAX SAVINGS
If you are going to diversify your portfolio to prepare for a recession, it makes sense to look at the long-term advantages of beefing up your contributions to tax-advantaged vehicles like 401(k)s, IRAs, and even college 529 and Coverdell savings accounts.
While less glamorous than stocks, money contributed to a retirement or education savings account will continue to grow even after the recession, and, over time, the money you save on taxes will likely offset what you might have made on high-risk stock market investments.
9. RE-EVALUATE INSURANCE COVERAGE
Taking a hard look at your insurance coverage is also a wise step at this point. Making sure you have adequate health or disability insurance, as well as coverage for your home and car can help you avoid a major expense when you can least afford it.
On the other hand, if you discover you are overpaying on insurance for services you do not need, you can potentially free up extra cash for your emergency fund or savings.
10. CONSULT A FINANCIAL ADVISOR
If you are concerned about exactly how a recession might affect you or you need help managing debts, budgeting, or setting up a retirement plan—it might help to talk to an expert.
A certified financial planner can help you understand the specific risks an economic slowdown might pose to your money situation and long-term goals and can also help you master the financial skills you need to recession-proof your finances.
EXPERT ADVICE, TAILORED TO YOUR NEEDS
At GHS Federal Credit Union, we put financial wellness at the center of everything we do.
When times are tough (and even when they’re not), most people could use a little help understanding and managing their finances better.
That’s why GHS’s certified financial planners offer free financial wellness coaching and support to our members and the community. We offer help with challenges like debt, low credit scores, or major unplanned expenses. We also assist individuals and groups with important finance literacy and financial wellness skills.
Our services include:
Credit Score Coaching
Back-to-Basics Budgeting
Family Financial Planning
Debt Repayment Planning
Retirement Planning
Estate Planning
Financial Crisis Counseling
As a credit union, we’re here to make sure our members prosper and our community thrives. Contact us today or click below to learn more about our financial wellness services.