While stocks are prone to fluctuation, the recent dips have sparked concerns that the country could fall back into a recession—an extreme economic slowdown that would likely mean a decrease in consumer spending and could lead to job losses or issues with employment if companies are forced to adjust.
While the discomfort of a recession will be felt by most of us, there are ways to prepare your finances to see yourself through any economic turmoil, and potentially come out on top.
Jackie Boies, of Money Management, says not to worry too much if you are hearing signs that the U.S. is headed towards a recession.
She told Newsweek: “While you might feel concern about a looming recession, don’t worry. Instead, focus your energy on your overall financial health. Make changes now that will ensure your success during a recession and beyond.”
From making preparations for a turbulent job market, to securing your savings, and diversifying your income, here are the top tips from financial experts on how to prepare your finances for an economic recession.
1. Don’t fear a bear market
One of the key signs that the U.S. could be headed towards a recession a dramatic decline is the stock market.
A bear market is defined as a prolonged drop in investment prices of at least 20 percent, though these types of dips are not uncommon. There have been 26 bear markets in the S&P 500 Index since 1928, whereas there have only been 19 official recessions in that time.
A bear market can often be caused by investors pulling their money from a declining stock market until things even out.
Around 58 percent of Americans had invested in stocks and shares of some kind in 2022 thus far, according to the research by workplace consultancy, Gallup, meaning a majority of Americans could see a significant impact on their savings if stocks begin to plummet.
But Bruce Tannahill of MassMutual told Newsweek that a recession could be a great time to invest while stock prices are low: “A recession can be an excellent time to invest more in stocks if you have at least 3-6 months of savings. A lower stock price means you can buy more shares with the same investment.
“When the stock price increases, you’ll have more shares to benefit from the price increase. You may want to sell stocks that are worth less than you paid for them to harvest the loss. It can be used to offset capital gains from selling stocks that have appreciated.”
Kathryn Wakefield of MassMutual suggested riding out the ups and downs.
She told Newsweek: “It can be comforting to move assets so you do not have to weather market turbulence, but check out this example.
“You purchase a winter coat for $100. You keep it all winter then sell it in the summer for $50 when winter jackets are marked down. You then purchase the same jacket back the following winter for $150 because you like the jacket even though the price has gone up. That’s a bad deal, because you lost $50 on the sale and spent one-and-a-half times the original amount to purchase the same item again.
“Same is true with selling out of a bad market then repurchasing in a better one. The same principle applies to the market and investing. Don’t capture the loss. Ride out the down market and know that it will get better again.”
Wakefield also emphasized that pulling your funds from the falling stocks could leave you losing out in the long term: “Withdrawing stocks and investments in a down market can be unwise unless there is an immediate need for funds that are not available elsewhere. The reason being, if you sell out of your equity positions, you’ve officially captured any loss you may be showing on paper.
“What goes down will come back up as the market has proved time and time again. So, if you sell while there is a loss and there is not an immediate need to do so, you’ve taken the loss from on paper and made it real.”
2. Try to clear outstanding debt
If you are concerned about your day-to-day finances during a recession, clearing your debts as much as possible could help reduce your monthly outgoings and free yourself up for more, or better, credit if you need it later down the line.
Boies said: “If you’re already struggling with debt you’re likely have a more difficult time during a recession. Start now making the necessary changes.”
Boies recommends beginning with your credit cards, paying off your high-interest debts first and not taking on new debt if possible.
“If you owe several creditors, have large outstanding balances or are simply overwhelmed at the prospect of managing your debt reduction, reach out to a non-profit credit counseling agency such as Money Management International and work with a Counselor to develop and manage a plan that works for you,” she added.
3. Reduce your everyday spending
If prices continue to rise and household budgets feel the strain, cutting down on your everyday costs is one of the simplest ways you can control how much of an impact a recession may have on your finances.
Boies suggests creating a budget and tracking your spending to find ways to cut down on your expenses: “Review your monthly expenses and make reductions where you can: reduce or cut your cable, change your phone and internet plan, cut back on entertainment, shopping, lunches at work, stops at the coffee shop, trips to the salon.
“You’ll be shocked at how quickly casual spending adds up. Be purposeful and mindful about how you spend every dollar.”
Boies recommends aiming to save 20 percent of your income into an emergency fund, which should aim to cover at least 3 months of regular spending, just in case the worst happens and you find yourself looking for a new job.
“With budget reductions in place, apply your “found” money to your savings and build an emergency fund. Ideally, 20 percent of your income should be going into savings.
“If you can’t manage 20 percent to start, begin where you can and work up. Set a goal to have enough saved to cover 3 to 6 months of your regular living costs. Once you’re there, work toward 12 months.
“You can both save and pay off debt, but you’ll need to be flexible, creative and intentional! Recession or not, your overall financial health will be most affect how you and your family fare in an economic downturn.”
