Key points to remember
- Recessions carry many dangers, including job loss, rising prices and high interest rates.
- While these issues can be financially taxing, there are steps you can take to reduce your liability in the event of an economic downturn.
- If you can, keep contributing to your investments and take advantage of “sold” stocks.
News reports indicate that a recession is likely. Regardless of whether the National Bureau of Economic Research (NBER) officially announces a recession, tough economic times are already here in the form of mass layoffs, rent hikes, interest rate hikes and high prices.
What can you do to prepare your finances when all the cards seem to be stacked against you? Let’s dive into some concrete steps you can take today to improve your financial situation during tough times.
Dangers the recession presents for your finances
Before discussing the solutions, we need to understand the problems caused by recessions. Several dangers are inherent in a recession and threaten your financial stability.
While this isn’t an exhaustive list of everything that can go wrong for you in a recession, these are some of the most common concerns.
One of the main indicators of a recession is unemployment. Economists have been reluctant to formally declare a recession due to low unemployment rates.
Although unemployment has remained low, some sectors are more stable than others in terms of job security. According to recent data released by the Bureau of Labor Statistics, jobs in professional/business services and leisure/hospitality suffered heavy losses. Other sectors, such as government, education and real estate leasing, remained strong.
If we look at consumer spending and economic trends, it’s easy to see why specific sectors are seeing more layoffs. Many tech companies have taken on too many employees during the pandemic and are seeing their stock values plummet, so they are cutting jobs. In addition, people fear the effects of inflation and uncertainty on their budget, so they spend less on travel.
However, consumers still have to send their children to school and rent a home during a recession, so the real estate rental and education sectors remain relatively unscathed.
Inability to get or pay a mortgage
The Fed has raised interest rates to fight inflation, which has been effective so far. While year-on-year inflation in November 2022 is 7.1%, the Consumer Price Index (an indicator of price inflation, also known as the CPI) rose only 0.1% in November.
The unfortunate side effect is that it raises mortgage rates. This excludes many potential buyers from the market. Those with sufficient income to qualify for a lower payment no longer do so once the higher interest rate is factored into the cost.
Additionally, many people are hesitant to take out a mortgage during a recession because they could lose their jobs or be forced to spend more on daily necessities as prices rise.
Most Americans feel the pressure of higher prices every time they step out to the grocery store or the gas pump. CPI data shows that the cost of energy and food was the source of most price increases. Food increased by 10.6% and energy by 13.1%.
Unfortunately, food and energy are purchases that people cannot eliminate from their budget.
2022 has been tough on Americans’ budgets, but it’s been just as tough on their retirement savings. The average balance of $401,000 fell from $126,100 to $97,200, a decrease of 22.9%.
Watching your hard-earned money in a retirement account plummet is sickening, even when you’re working and still have time to recoup your losses. However, it can be devastating to those who rely on their retirement savings to earn a living.
In a survey of retirees in 2022, 13% said an IRA was a major source of their income and 33% said it was a minor source. Work-sponsored retirement plans (like a 401k) were a major source for 12% of retirees and a minor source for 24%.
While Social Security and pensions represent the biggest sources of income, for those on fixed incomes, having to sell stocks to pay for daily needs as they drop is a tough pill to swallow.
How to prepare your finances for a recession
While many headlines predict pessimism for 2023, the good news is that there are ways to survive a recession.
Boost your skills
If you’re worried about the stability of your work, wringing your hands won’t help. Instead, work on becoming indispensable to your business.
Broaden or deepen the skills you offer. Think creatively about ways to save money for your organization or get more done.
Michael Gibbs, CEO of Go Cloud Careers, suggests moving into a sales role for maximum job stability. He says, “Those in positions that help increase overall company revenue are those most likely to remain securely employed in a down economy.”
Work your network
If you start hearing rumors of layoffs at work or are worried about your job stability, reach out to your network early. For maximum success, start networking before you need to. Refresh your dusty LinkedIn profile, reconnect with old contacts, and ping your forgotten friends on social media.
Ironically, networking is most effective when you offer genuine help to others. Forget your personal agenda and instead ask yourself how you can help others. Once you’ve done someone else a favor or given a presentation, the other person will naturally want to reciprocate.
Also, don’t forget to follow up and thank them for any help, advice, or referrals you receive.
Pay off high interest debt
With rising interest rates, variable rate debt balances (like credit cards) can go from bad to worse. Make it a priority to pay off high-interest debt as quickly as possible. At a minimum, you should avoid adding anything to your debt balance that has a high interest rate.
Paying extra on your debt when prices rise may seem difficult, but your efforts will add up as your reduced payments free up money for other purchases. It may be helpful to temporarily take on a side hustle or sell personal items to pay off your debt.
Increase your savings
Emergency savings accounts were designed for disasters brought on by recessions, such as the sudden loss of a job. Even if your income is secure, it’s worth increasing your savings if you can afford it.
Saving for a rainy day can be tough. Only 37% of Americans have saved more than a month of expenses. The average job search is about five months, so running out of money in the event of a layoff is a considerable risk.
Fortunately, by adding a small amount to your savings account each month, you can mitigate this risk and give yourself time to wait for a job that suits you rather than taking the first one that comes along.
Reduce unnecessary expenses
Cutting the fat from your budget is the fastest way to free up money for necessities, savings, or debt reduction. The best way to do this is to track your expenses.
Use a spreadsheet or app to track your daily expenses so you know where your money is going. Then you can decide what can be redirected to your debt or your savings.
Although it may seem painful, cutting your expenses doesn’t necessarily mean eliminating all the pleasures. Some of the most effective ways to save are to check for leaked money in the form of subscriptions you don’t use, or research insurance and cell phone providers.
With these strategies, you can reduce your expenses and save your avocado toast.
Keep Calm and carry on
The NBER doesn’t issue a red “Don’t Panic” button with the declaration of a recession, but they probably should. The reality is that most people won’t lose their jobs, wallets will likely recover, and a recession won’t last forever.
If you’re already making smart financial choices, stay the course, especially with your investments. In the words of Warren Buffett, “Be fearful when others are greedy and greedy when others are fearful.”
Stocks of all shapes and sizes are on sale. During a recession, sticking to a cost-average investment plan will be your best long-term friend.
The bottom line
If you’re lucky enough to be able to invest during a recession, put your money where you can best protect it with Q.ai’s investment kits. You can activate portfolio protection at any time to reduce your losses.
You also don’t have to scour the headlines to see where each industry is heading. Powered by Artificial Intelligence (AI) technology, Q.ai does that work for you. It aggregates investments from various sectors so that you can automatically place your money in a diverse group of assets.
Download Q.ai today to access AI-powered investment strategies.