Economic uncertainty is running high since the news of a great recession has hit the headlines.
But did you know the right savings and investment strategy can minimize its damage? While some financial experts are encouraging us to prepare for a recession immediately, other economists claim that we might have time till 2024. But we know for certain that we’ve hit high inflation, which has affected various essential commodities, such as gas and home prices, and has even lowered stock market prices.
Moreover, the Federal Reserve is tightening its grip on funds, and when coupled with higher rates of job loss, most Americans are left feeling uncertain about their emergency savings. Nonetheless, you can never be too prepared, so it’s best to start taking precautions to maintain your financial position. The most effective way to get started is to conduct some economic research and learn how a recession works.
Here are some insightful takes on creating emergency funds and cutting down your living expenses. Read on!
What Is A Recession?
When a region’s economy steadily declines over the span of several months or years, it is called an economic recession. Unlike the great depression, when the economic decline lasts for several years, a recession usually stops after a certain period of time, after which the economy recovers.
When a recession hits, the country’s gross domestic product (GDP), which indicates the total price of the goods and services it produces, drops in value. Similarly, there might be a steep rise in prices of commodities like gas or oil, which is essential in today’s world. And this might potentially bring industries to a screeching halt.
Moreover, certain profitable businesses and industries may lower in value while you’ll notice a rise in job loss. And as a result, there’s a lack of “consumer confidence,” leading to lower demands and the need to spend more money on luxuries.
For example, America suffered from a significant recession when the real estate industry collapsed due to high-interest rates and problems with debt payments. More recently, the pandemic kickstarted yet another recession in the early months of 2020 due to major losses in multiple industries. That year, the GDP steadily lowered for two consecutive quarters, but the interest rate and GDP increased in the third quarter.
What Happens During A Recession?
A recession is directly proportional to lower sales or stunted economic growth in companies, and often they lose money to the point of closing down. Many organizations lay off a massive amount of staff to cut down expenses, resulting in mass unemployment. And in the process, hiring procedures across all industries slow down.
Moreover, investments can suffer from the loss of money, which can directly affect dividend stocks and other savings accounts (including your retirement accounts). It can also get more difficult to earn credit since lenders can increase the lending requirements to avoid losing money.
Recession is an inevitable aspect of the economy, but they’re quite unpredictable and can hit any time with varying intensity. That’s why fostering certain money habits can safeguard your personal circumstances, even in cases of job losses.
How To Prepare For A Recession
1. Use Your Money Wisely
Since the price of the dollar has significantly increased, you must learn how to spend money in a more sustainable manner. Recently, this habit has been pertinent to increasing gas prices, and one way to save extra money on transport is to opt for public transportation, walking, and even carpooling.
Ensure every time you use a personal vehicle, it is worth it. Schedule multiple stops while driving and shopping locally to get things done in a single trip.
However, if cutting down on using your personal vehicle sounds like a bad idea to you, consider applying for a gas rewards credit card. This way, you can earn various rewards and discounts without paying high-interest rates.
2. Review Your Expenditure
If you feel like your emergency fund isn’t sustainable enough during an economic crash, it’s important to review and eliminate any extra costs to save money. If possible, hire a financial advisor to review your extra payments and individual stocks and draw up a financial plan.
But if you’re an organized person aware of their investments and expenses, simply look for things you pay for that aren’t required. Beyond the three necessities (food, rent, and utilities), you must be extra careful while spending money.
For example, many people have recurring subscriptions or memberships to streaming services and gyms that they don’t even use. This way, you’ll find yourself paying monthly fees for various services without knowing it. So, no matter how late you recognize this wastage, you should immediately cancel the membership.
3. Get Rid of Credit Card Debt
With increasing grocery, travel, and gas prices, more and more people are turning to credit cards to pay their bills. However, if you don’t pay off the entire debt at the end of each billing cycle, your total debt will start building up quickly.
Moreover, carrying the previous balance over to the next cycle will lead to a high-interest debt that’ll be quite difficult to repay, especially if you’re in a pocket pinch. You can prevent interest from accruing over time by opting for a balance transfer credit card, which allows you to pay off the balance free from interest.
4. Boost Your Emergency Fund
Recession means there’s always a possibility of layoff or job loss, so it’s necessary to amp up your emergency fund while you still can. Place any tax refund or reward money coming your way into your retirement account or a high-yield savings account to benefit from the high-interest rates.
Moreover, consider opening a Roth IRA account instead of a traditional Roth since it allows you to withdraw funds without paying interest, even if you’re in a higher tax bracket. And since your Roth funds are invested in the market, you can benefit from a downturn and earn extra cash.
5. Continue Streamlining Your Investments
While a declining economy may scare you into considering withdrawing your stock or index fund, investing in the stock market is a long-term process that requires commitment. Professional investors know that a market downturn is the best time to purchase stocks with a diversified portfolio since stocks tend to sell for cheap during this time.
And depending on your risk tolerance, you can use either short stocks or stick to dollar-cost averaging. Regardless of your strategy, you’re sure to benefit from it by committing to it even in volatile situations.
Furthermore, you can take government subsidies by realizing your loss on the stock prices. For example, if you choose to sell an underperforming stock, you can use this loss (when the buying price is higher than the selling price) to reduce your taxable assets.
6. Repay Your Debts
If there’s a looming job loss during a recession, you might have to let go of one of your assets in debt to cover the loss of income. That’s why it’s important to classify your debts into different priority levels and start paying off the ones on the top of the list before the next recession.
Ensure you pay a hefty down payment if you’re purchasing something to reduce the principal of the loan and debt and pay off as much as possible. Mortgages, rent, and car loans should be on top of the priority list while trying to pay off your medical bills with insurance through your employer, if possible.
We’ve already touched upon the fact that, more often than not, a recession spells unemployment, and the only way to survive during this time is by increasing your professional worth.
Firstly, revamp your professional connection and build relationships with people in similar positions – don’t forget to consider connections beyond your current company. Establishing connections in multiple organizations will open up various paths for you, especially if you get references.
Secondly, update your resume and get access to different job-hunting tools before a recession hits. Moreover, the job market is very fluid, and a new skill comes in demand every other day. So, many professionals invest significantly in personal improvement by continuing education – getting a few certifications and diplomas in relevant skills to become future-proof.
It is impossible to predict an economic decline or world event that might happen over upcoming months and years, and the pandemic is a prime example of this. However, following some safe money habits will help you keep your finances in optimal condition despite what the future brings.
Keeping yourself out of debt, improving your credit score, consistently investing in stocks with good portfolio value, upskilling, etc., are some foolproof methods of achieving financial success. Moreover, you can hire a certified financial planner to keep your finances in check in case of multiple assets and investments.
With that, we’ll be signing off for now. See you next time!
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