A choir of economists and financial experts is predicting that the US is going into recession.
Previous recessions have been characterized by massive layoffs, bankruptcies, high borrowing costs and stock market turmoil.
No one can predict the future, but you have to stay calm. Gather facts and act deliberately to protect your financial situation.
After years of low unemployment and high market growth, the clouds of an economic storm are moving.
Reports that record high inflation continues to slow consumer spending and sales reports from supermarkets like Walmart and Target boost market selling are worrying economists and experts we’re entering a recession.
They pay attention to the gross domestic product (GDP) or gross domestic product (the value of all goods and services produced within a country during a specific period of time). This value is a key indicator used to measure economic growth and recession. In the first three months of 2022, U.S. GDP declined 1.4% due to a sharp rise in COVID-19 cases and rising inflation. War and stock market turmoil in Ukraine were exacerbated by widespread economic problems. If GDP falls for two straight quarters, the country is technically in recession. (Usually, the National Economic Research Institute makes official contact, but it has not been made yet.)
With growing concerns about an impending recession in the United States, you may be concerned, or at least a little, wondering what this means for your money. The audience of the My So Money podcast recently sent out several recession-related questions about how to best prepare, save, invest, and generally take smart financial action during these uncertain times. Here are some tips to help many of us navigate difficult financial times.
First, what usually happens to recessions?
It’s always helpful to go back and review the results in your spare time so you can manage your expectations. Every recession is different in duration, severity and outcome, but we tend to see more layoffs during recessions. Access to the credit market can be more difficult and banks can get their loans later because they are afraid of the base rate.
If the Fed continues to raise interest rates to contain inflation, borrowing costs could increase. So, even if you are eligible for a loan or credit card, your interest rate may be higher than the previous year. We’re already seeing this in the mortgage market, where the average 30-year fixed mortgage rate is above 5%, the highest level since 2009.
The bright side of some recessions is that when prices rise and inflation falls, prices of goods and services fall and personal savings rates rise. We can also see a slight increase in entrepreneurship, such as those newly unemployed with the Great Depression of 2009 were inspired to turn their small business ideas into reality.
Should I stop investing in my 401(k)?
As stock prices have been down for weeks, many want to know how a recession can affect long-term investing. Should I stop investing? The short answer is no. At least not if you can help him. Avoid panic and withdraw your money because you can’t stand the volatility or watch the stock go down.
My advice is to avoid unexpected reactions. This can be a good time to review your investments to make sure you are well diversified. If your risk appetite suddenly changes for any reason, consult a financial professional to determine if you need to adjust your portfolio. Some online advisor platforms may provide customer service and provide guidance.
It’s good to stick to the market historically. Investors who cashed out 401(k) during the Great Depression lost their rebound. The S&P 500 is up nearly 150% since its 2009 lows after adjusting for inflation.
The only caveat is that if you desperately need the money in the stock market to pay for emergency expenses such as medical bills, there is no other way to afford it. In this case, you may want to consider a 401(k) loan option. If you decide to borrow money from your retirement account, promise to pay it back as soon as possible.
What if I or my partner are fired?
During the Great Depression, unemployment reached 10% and it took 8 to 9 months for unemployed people to find new jobs. So, if you think you’re short, now might be a good time to review your emergency fund. If you can’t afford at least six to nine months of expenses, aim to speed up your savings by cutting expenses or earning extra cash.
If you’re self-employed and you’re concerned about a potential downturn in your industry or losing customers, look for new sources of income. We also aim to increase our cash holdings. If past recessions have taught us anything, it’s that holding on to cash gives you more options and more control in difficult times.
What if debt rates soar or access to loans becomes difficult?
An adjustable rate hike could happen as the Fed continues to raise rates to contain inflation. This means you can increase your annual interest rates on your credit cards and loans and make your monthly payments more expensive. Contact your lender and card issuer to find out about low-interest credit options. Find out if you can refinance or consolidate your debt on a single fixed rate loan. In previous recessions, some banks were reluctant to lend during “normal” hours. This can be annoying if you rely on credit to expand your business or need a mortgage to buy a home. It’s time to pay attention to your credit score, which greatly influences your bank’s decisions. The higher your score, the more likely you are to qualify and get the best rate.
One last thing I want to say is that it’s important to remember that recessions are a normal part of the economic cycle. Long-term financial planning always has a bit of a downturn. Since World War II, the United States has gone through dozens of recessions, usually ending a year or less before. In contrast (and some good news), periods of expansion and growth are more frequent and longer lasting.