Recent estimates from a Federal Reserve GDP tracker indicate a 2.1% decline in real GDP growth in the second quarter of this year, suggesting the U.S. may already be in a recession. But business cycles can be difficult to predict, so it’s important to always have a plan to weather future economic downturns.
Amid a recession or simply an economic slump, consumers have a tendency to panic and make poor financial decisions. Instead, follow these expert-endorsed tips to successfully survive an economic downturn.
— Manage financial stress.
— Change the way you spend.
— Review your asset allocation.
— Reduce variable rate debts.
— Plan for a possible job loss.
Manage Financial Stress
These days, it’s easy to experience anxiety and stress around the future of the economy.
The latest bout of inflation is causing high price tags on essential consumer goods to skyrocket. News headlines are filled with recession speculation, bear market fears and interest rate hikes.
“Things are costing more,” says Amy Hubble, principal investment advisor at Radix Financial. “People are starting to feel it more, they’re spending more at the grocery store and more at the gas pump. That puts anxiety in people’s heads.”
But business cycles consisting of periods of growth and contraction are normal and have been observed time and time again throughout the country’s history. The U.S. has entered a formal recession 14 times since the Great Depression. Recessions have lasted an average of 17.5 months historically, with the most recent recession occurring in February of 2020 and lasting only two months.
To manage your financial stress, educate yourself about business cycles and make a plan to weather this and future downturns that are an inevitable part of any economy. In the end, Hubble says the long-term effect of a recession on most consumers is minimal.
Change the Way You Spend
With a recession looming, it’s time to review your budget.
Start by reviewing how your expenses have changed over the last year to determine where cuts should be made.
“A recession is something your financial planner should have already accounted for,” says David Rae, president of DRM Wealth Management. “You might make small adjustments, like if your rent goes up 30%, but those are adjustments rather than drastic changes.”
During the Great Recession that ended in 2009, consumer spending experienced its most severe decline since World War II.. According to Pradeep Chintagunta at the University of Chicago Booth School of Business and Shirsho Biswas at the University of Washington Foster School of Business, research indicates consumers tend to shift spending away from non-essential categories and often become more price sensitive during recessions.
But exactly how individuals will be affected by a recession and rising prices varies.
“The Great Recession was particularly painful on the young, poor and middle class,” Chintagunta and Biswas wrote in an email. “But not all consumer groups responded equally in terms of changes to their consumption behavior.”
For example, they note, “food at home expenditures went up disproportionately more for older, more educated, white and Asian households” and “younger households switched more to warehouse clubs, whereas older households switched more to discount stores.”
Review Your Asset Allocation
Investing during a recession can be scary, but experts suggest that sticking to your investing plan during an economic downturn is critical to its success — and retreating to typical safe-haven assets like bonds comes with risks.
“There’s a cost to safety,” Rae says. “You don’t lose money when the market goes down, but you don’t make money when the market goes up.”
Investors have a tendency to panic when their portfolios take a significant loss. But imagine selling all of your equity assets during the early days of the coronavirus pandemic just two years ago — and missing out on the subsequent market rise that followed.
The latest market slump can be viewed as an opportunity, Hubble says.
“If I had any cash left it would be in the market,” she says.
Reduce Variable Rate Debts
Though minor changes may be made to your investing strategy, major ones may be made to your plans to borrow debt or pay off existing variable rate loans.
“Whether you are in an expansion period or a recession period, you really don’t want to change your activity toward saving and investing,” Hubble says. “You may, however, want to change your posture toward spending and taking on debt.”
As the Federal Reserve seeks to tame high inflation, it plans to continue raising interest rates. Higher interest rates make it more costly for individuals to borrow money and make variable rate loans, like credit card debt, to become more expensive.
Take another look at your existing debts and consider paying off those with variable interest rates. If you’re seeking to become a homeowner or take on any other major debts, consider delaying these purchases or adjusting your budget to accommodate the greater expense associated with borrowing today.
Plan for a Possible Job Loss
During recessions, the unemployment rate typically rises. Take a moment to consider your own personal risk and plan accordingly.
“How likely are you to be one of those people losing your jobs? If you’re a Realtor or mortgage broker, for example, things could be tough going forward,” Rae says.
Work to make yourself more valuable to your employer while dusting off your resume and keeping an eye on other job opportunities.
In the worst-case scenario in which you do experience a layoff, having already built up an emergency fund of, at minimum, three to six months of expenses saved in cash is key.
“In a recessionary situation, the biggest risk is that you could lose your income,” Hubble says. “So you want to have cash on hand to make sure you can weather a loss of income.”
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