October 27, 2022
Some of the most opinionated people in the world of finance and economics have been talking about one thing as of late: economic recession. Nearly every Fortune 500 company, business journal, investment bank, economist, and retail investor are sounding off about the next one…
In July 2022, 68% of polled executives indicated they expect a recession in the first half of 2023. 70% of economists polled in a recent survey are expecting an economic recession in 2023. And the American public? As many as 70% of them were awaiting a downturn, citing high inflation and rising unemployment.
That unprecedented agreeableness insinuates that recession predictions are looking more like recession promises. It might be hard to believe given that the U.S. economy is boasting more than 11 million open jobs and near record-low unemployment as of July 2022, but the economic recession might already be here.
Millions of Americans shouldn’t wait until the talking heads call it, by the way. Economic recessions might mean real money and job trouble – especially if you’re ill prepared. That’s why we’ve put together a checklist of things to do to help prepare for the recession:
Zoom Out and Get the Big Picture
Take an hour or two to get the 40,000 foot view of your financial situation. How much money do you have coming in each month? Where does it go? How much of it goes to rent, utilities, groceries, paying off debt (loans), and other expenses?
Once you have a clear idea of how much money you have coming in and going out, you can make clearer financial decisions. You should ideally be able to quickly identify where the majority of your money is going and where you can cut costs.
The worst thing you could do is panic. The best thing you can do is plan and execute.
Kill Your Debts: Pay Down What You Can
World banks have been raising interest rates to combat high inflation, a huge boon for savers. However, what is great for savers doubles as a nightmare for the “credit rich” – and America has millions of people who are rich in credit, broke in cash.
That’s because Americans have a bad relationship with credit. Carrying balances on credit cards and personal loans is not like your friends spotting you at the bar; it’s the largest obstacle to building wealth.
Don’t be afraid of debt, though: it can be a resource for people with good credit, money sense, and a plan. It is especially useful to use debt when buying a house (mortgage), car (auto loan), getting a meaningful education (student loan), or refinancing high interest rate debt (personal loans).
Unfortunately, many Americans lack competency in how to use credit to their advantage and how to kill what doesn’t serve them. That means that they are often borrowing at high interest rates, spending frivolously, making minimum payments, and facing the black box that is variable rate borrowing.
That means that – if you have the wherewithal to do so – you should be killing credit card debt and unnecessary personal loans. Pay all of the statement balance, don’t spend beyond your means, and refinance high interest rate debt using a personal loan if you need to.
Once you’ve tackled your credit card debt (hopefully you had none in the first place), the next stop is killing loans which carry interest rates above 5%. That might not always be possible, especially if your credit is considered poor or below average. However, options to refinance high interest obligations are plentiful – so shop around.
Save: Prepare In the Boom Times For Security In the Broke Times
Where recessions go, layoffs tend to follow – we don’t want to be pessimists, but even if you think you have a great job, you might not have it when this market rears its ugly head.
That’s why it’s imperative that people save during good times for security in the bad times. Hopefully, you’ll never need it, but by putting aside at least three to six months of expenses, you’ll feel a little better if and when the economy goes south.
If you work in a high-risk environment – such as in a freelance, contract, or part-time capacity – you might want to save even more. You can decide how much you want to put aside by looking at the “Big Picture” we mentioned earlier – but your calculations should consider how many months you expect to be without a full income.
And remember the part where we talked about interest rates? Well, while rising rates are much to the detriment of serial borrowers, it pays the savers among us. That might change if – and when – an economic recession takes its toll, but it doesn’t change the here and now.
Go Long: Invest Regardless of What The Market Does To Beat Inflation
Once you’ve taken score of your finances, killed frivolous debts, saved three to six months of expenses, then there’s only one thing to do. And no, it’s not to buy designer clothes or run up bar tabs…
Instead, you should take advantage of all the fear and uncertainty that the market has to offer. As of July 2022, equities are down more -20% and America’s leading indexes are in a bear market. There’s no telling how much lower they could go, but if investing in equities makes sense for your circumstances, you might want to consider to stay the course and invest through the ups and downs.
In spite of that recognition, many investors claim they’re waiting for a “better price” to buy; these are often people without a plan, trying to predict the bottom of the market. But as indexes and historical performance has shown again and again, the best time to invest isn’t a set time or set price.
Instead, the best time to invest is all the time – or as consistently as you can afford to do. Assuming you’ve taken a picture of your finances, have saved an appropriate amount of runway for yourself, and paid down frivolous debt, making investments for the intermediate to long-term is going to be your proverbial “financial final frontier.”
Try to prioritize qualified accounts such as an employer-offered plan (401(K), 403(b), SEP) or an individual account (IRA, Roth IRA) which will offer tax savings or tax-free distributions. And assuming you can make the best of those qualified accounts (a/k/a: max them), your last stop would be your brokerage account – your Robinhood, TD Ameritrade or Fidelity.
What’s the last financial frontier? Another way to interpret this question is how to go beyond money as an end. Trying to predict which asset classes will perform best in a given time is nearly impossible, so maybe going long and closely tracking your asset is what could make money work for you and fuel your financial goals — download Front to track your stocks and crypto in one place.