Some economists project that a recession is looming in 2023, while others suggest that we’re already in it. If we apply the rule of thumb for a recession – two consecutive quarters of negative gross domestic product (GDP) growth – then the US is currently in a recession following the last two negative quarters.
Historically, there are a number of other indicators of recessions including increased unemployment or job reductions, drops in the stock market, an inverted interest rate curve, weak consumer confidence, and a cooling of housing prices in the market. To combat a recession, the Federal Reserve will generally reduce interest rates to try to stimulate the economy. As you know, that’s not what is happening right now. Just the opposite – the Fed is pushing rates upward. That is one sign that supports the pundits that say we’re not in a recession, just yet.
Regardless of whether we’re in one or going to be, recessions often create hardships and financial discomfort for many consumers. Preparing for a recession can greatly help your financial security, and reduce the stress. But what can you do if the recession is already here or just around the corner?
Here are some suggestions to thrive financially during a recession.
Set a budget and stick to it – budgeting is planning and tracking from a financial perspective. A budget helps you to live within your means by tracking where the money that is being earned is being spent. Often it can help you understand where you can cut back, by focusing on spending on the things that are most important. It can also help establish a goal for increased savings and financial security.
Build up your emergency savings – having an emergency fund isn’t just a smart way to plan for the unexpected, it can reduce stress during a recession. An emergency savings account should hold an amount sufficient to cover 3 to 6 months living expenses . . . essentials like housing, utilities, transportation (like car payments, gas and maintenance), food, health care, etc. . . to cover you should you lose your job. And in tougher economic times, it may take longer to find a new job, so 12 months of living expenses may be a better target.
Reduce your debt – having less debt to pay off can also reduce stress, and it can save you money. Start by paying off the loans with the highest interest, typically that’s a credit card. When you’re putting less of your paycheck to cover debt, you can add more to your savings and investing.
Review your investments – stocks and assets can often lose value in recessions. That doesn’t mean you should stop putting money into your 401k plan at work or not invest during a recession. There can be good opportunities if done smartly and investing fears are addressed properly. One way is to diversify your investments – spread them across different sectors or areas. Most experts agree that it is important to understand your risk tolerance, research the options, and develop a plan for the long term. Many consumers want to speak with an investment professional.
Live frugally – sure, most of us like to live comfortably and enjoy things. But taking some time to live frugally can help us do just that. Personal finance authority and radio show host, Dave Ramsey, has a saying “If you live like no one else now, later you can live and give like no one else.” Basically, don’t live like you’re trying to ‘keep up with the Joneses’ and you may be able to truly enjoy the things that really matter to you and share with others. One way to do this in a dual-income household is to live on one person’s income and save the other. It is a technique that can move people from ‘living beyond their means’ to ‘living below their means.’ As a result, you can boost the emergency savings as well as investments.
Finally, prepare now – don’t wait until things are really dire to begin planning and preparing by budgeting, savings, and making good financial decisions. There’s truly no better time than now.