Recession is no longer a buzzword, and may soon be a reality for Americans.
Signs that the U.S. economy may be going into one are becoming more ominous. Inflation is at its highest level in 40 years, the Fed is hiking interest rates, and the occurrence of an inverted yield curve are all considered by many as a bellwether for an economic recession.
A recent Reuters poll showed that 40% of economists believe the U.S. economy will fall into a recession within the next 24 months. 81% of adults believe that the U.S. economy will slip into a recession this year according to a survey carried out by CNBC.
Corporate America is issuing warnings. Elon Musk has decided to lay off 10% of Tesla’s workforce based on a ‘super bad feeling’ about the economy. This action came days after JP Morgan CEO, Jamie Dimon warned that an economic hurricane is headed our way.
Perhaps the recession fears couldn’t have been more pronounced when retail stores announced slower sales, a shift in consumer buying, and lowered their forecast for the coming quarter.
Retail stalwarts like Walmart, Target, and Home Depot all lowered their outlook for the coming quarter, citing inflationary concerns.
Given the macroeconomic scenario, it is obvious that investors should be prepared for the worst. This means now’s the best possible time to prepare your money.
But to know how best to deploy your money, you need to understand what a recession is, and how best to navigate its murky waters.
What is a Recession?
A recession means a significant decline in general economic activity.
The macroeconomic term has traditionally been recognized as two consecutive quarters of decline, as reflected by gross domestic product (GDP) and other indicators such as unemployment, real income, employment, and manufacturing activity.
Recessions are inevitable, but they aren’t necessarily predictable. It’s impossible to know in advance exactly when they’ll hit or how bad they’ll get. Some recessions are mild, others are prolonged.
The crux of the matter is that an economic downturn would wreak havoc on millions of people’s financial lives. Many people may not be able to recover to normalcy from the economic growth that comes thereafter.
6 Ways to Prepare For a Recession
While you can’t control what happens to the wider economy, you can take a few steps to help you survive the financial headwinds.
Here are my tips to get ahead of the gloomy economic tide and recession-proof your cash.
1. Cut back on spending.
Basic necessities have gotten more expensive recently — groceries, gas, transportation, homes — which means it’s time to reevaluate your budget and look for areas to cut back.
The easiest items to scrap are services or purchases you can live without — dining out, recurring subscription services, or going to games of your favorite teams.
You may find yourself in a dilemma trying to select which areas cut spending. It’s all about weighing your current priorities with your long-term goals.
2. Stack up for rainy-day.
A recession is characterized by a tighter money flow, which means many people will not be able to afford their current lifestyle.
A recent survey showed that nearly half of people earning $100k annually are living paycheck to paycheck. As such, every dollar note should be properly utilized.
One area you can put your money to good use is using it to stack up on foodstuffs and other items you may need. You can buy groceries in excess, provided you know you would need them in the long term.
Perishables can be sliced and stored in a refrigerator. This also makes sense as the price of consumables and other necessities is skyrocketing. So stacking up saves you money that you would desperately need going into a recession.
3. Build emergency reserves.
Recession or not, you should have an emergency fund.
These savings help you avoid borrowing money to cover unforeseen costs like repairs, medical treatments, or job loss.
Job layoffs usually accompany a recession. So you have to prepare yourself for a potential furlough or outright sack – that’s if your company does not wind down its operations and close shop.
Yet many people seem to be unprepared for this economic hurricane. About 25% of Americans say they have no emergency savings at all. If you’re just starting out, give yourself a target of six months’ worth of expenses, then you increase your war chest as time goes by.
Make provisions for necessary items like rent, utilities, and groceries.
Make sure to store your emergency money in a liquid account (like a high-yield savings account) to easily access it when you need it.
4. Pay off high-interest debt.
The last thing you want to deal with during a recession is high-interest debt weighing your finances down.
Any loan above student loan or mortgage interest rates is usually regarded as high-interest debt. Debts like personal loans and credit card debts have much higher interest rates ranging from 9% to 20% or more.
In a recession, you may be fighting for survival or taking on more responsibilities like contributing more to the home front if your spouse loses his/her job. As such, paying a high-interest debt during a recession sets you back from optimizing whatever money you have left.
With the Federal Reserve set to issue more rate hikes later this year, you will want to reduce your debt burden as fast as possible, as your interest rate would increase.
Once you pay off your debt, you’ll have room in your budget to put towards other things, like growing your emergency fund or making up for rising consumer prices.
5. Keep calm and carry on.
Recessions can be an emotional and stressful time, especially when it comes to your investments.
Watching your portfolio fall into the red can be worrisome, but it’s important to avoid making a knee-jerk reaction.
You have to understand that the economy operates in cycles, and a recession is one of those cycles. However, in the long run, the economy always rebounds stronger.
So changing your investment strategy could hurt you in the long run. A recent example is the way the stock market rebounded from a 30% drop in March 2020 due to the pandemic.
If you really want to take action before any future recession, then rebalancing some of your investments is the way to go. Having a diversified portfolio can help you minimize your losses during a volatile market.
6. Have some cash handy.
Cash Is King in a recession.
The reduction in money supply will see people selling off assets and businesses to raise money. Those with money can buy assets cheaply and sell them at a premium when the economy begins to grow again.
This is why the wealthy consolidate their wealth during a recession. So, if you can afford it, keep some cash handy. Be on the lookout for the best bargains in town. Be opportunistic.
Key Takeaway
There’s no denying that the prospect of a recession can be frightening.
However, developing a plan ahead of time and taking the necessary actions to prepare yourself might lessen stress, helping you feel more in control of your situation.
There’s never a terrible moment to take a look at your finances and make the necessary changes.
There are a number of everyday behaviors that the typical person may adopt to protect oneself from the impacts of a recession before they occur, or even to prevent them from occurring at all.
