What to expect in a recession? How to prepare your finances to weather the storm

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Key learning points

  • Recessions bring many dangers, including job losses, rising prices and high interest rates.
  • While these issues can be financially painful, there are steps you can take to reduce your liability during an economic downturn.
  • If you are able, continue to contribute to your investments and take advantage of shares that are “for sale.”

News reports indicate that a recession is likely to come. Regardless of whether the National Bureau of Economic Research (NBER) officially declares a recession, tough economic times are already underway in the form of mass layoffs, rising rents, 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 look at some actionable steps you can take today to help your financial situation through tough times.

Dangers that the recession poses to your finances

Before discussing the solutions, we need to understand the problems that recessions cause. Several dangers are inherent in a recession and threaten your financial stability.

While this is not an exhaustive list of everything that can go wrong during a recession, these are some of the most common concerns.

Job loss

One of the most important indicators of a recession is unemployment. Economists have been hesitant to formally declare a recession due to low unemployment rates.

While unemployment has remained low, certain sectors are more stable than others in terms of job security. According to recent data released by the Bureau of Labor Statistics, professional/business services and jobs in the leisure/hospitality sector have suffered heavy losses. Other sectors, such as government, education and real estate rental, have remained strong.

Looking at consumer spending and economic trends, it’s easy to understand why specific industries are experiencing higher layoffs. Many tech companies have overhired during the pandemic and are seeing their share prices plummet, so they are cutting jobs. In addition, people are afraid of what inflation and uncertainty will do to their budgets, so they spend less on travel.

However, consumers still have to send their children to school and rent a house during a recession, so the real estate rental and education sectors remain relatively unscathed.

Inability to obtain or pay a mortgage

The Fed has raised interest rates to fight inflation, which has proven effective so far. While year-on-year inflation stands at 7.1% as of November 2022, the consumer price index (an indicator of price inflation, also known as the CPI) only increased by 0.1% in November.

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The unfortunate side effect is that this will raise mortgage rates. This prices many potential homebuyers out of the market. Those with enough income to qualify for a lower payment no longer do so once the higher interest rate is factored into the cost.

In addition, 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 everyday necessities as prices rise.

Price increases

Most Americans feel the pressure of higher prices when they check out at the grocery store or gas station. CPI data shows that the cost of energy and food is the cause of most price increases. Food is up 10.6% and energy is up 13.1%.

Unfortunately, food and energy are purchases that people cannot cut out of their budgets.

Losing portfolio

2022 was tough on Americans’ budgets, but it was just as tough on their retirement savings. The average 401k balance fell from $126,100 to $97,200, a decrease of 22.9%.

It’s sickening to watch your hard-earned money sink into a retirement account, even if you’re at work and still have time to recoup your losses. However, it can devastate those who depend on their retirement savings for income.

In a 2022 survey of retirees, 13% reported that an IRA was a major source of their income, and 33% said it was a minor source. Work-sponsored retirement plans (such as a 401K) were a major source for 12% of retirees and a minor source for 24%.

While Social Security and pensions are the main sources of income, it’s a tough pill for those on fixed incomes to have to sell stocks to pay for day-to-day needs as they fall.

How to prepare your finances to weather a recession

While many headlines predict doom and gloom for 2023, the good news is that there are ways to survive a recession.

Boost your skills

If you’re concerned about the stability of your job, wringing your hands won’t help. Instead, work on becoming indispensable to your business.

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Broaden or deepen the skills you offer. Think out-of-the-box about ways to save or make more money for your organization.

Michael Gibbs, CEO of Go Cloud Careers, suggests moving to a sales role for maximum job stability. He states, “Those who hold positions that help increase the company’s overall revenue are the ones most likely to remain safely employed in a down economy.”

Work on your network

If you start hearing rumors of job layoffs or are nervous about your job stability, reach out to your network early. For maximum success, start networking before you need to. Brush up on your dusty LinkedIn profile, reconnect with old contacts, and ping 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. If you are doing or proposing to someone else, of course the other person will want to reciprocate.

In addition, don’t forget to follow up and thank them for any help, advice or connections you receive.

Pay off debts with high interest

With rising interest rates, floating rate debt balances (such as credit cards) can go from bad to worse. Make it a priority to pay off the debts with high rates as soon as possible. At the very least, you should avoid adding to your high-interest debt balance.

Paying extra on your debt as prices rise may seem difficult, but your efforts will increase as your reduced payments free up money for other purchases. It can be useful to temporarily take up a side job or sell some personal items to pay off your debt.

Beef Savings

Emergency savings accounts are designed for disasters caused by recessions, such as sudden job losses. Even if your income is secure, it’s worth adding to your savings if you can afford it.

Saving for a rainy day can be challenging. Only 37% of Americans have saved for more than a month. The average job search takes about five months, so running out of money in the event of a layoff is a significant risk.

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Fortunately, by adding a small amount to your savings account each month, you can reduce that risk and give yourself time to wait for a job that’s right for you rather than accepting the first one that comes along.

Cut unnecessary expenses

Cutting the fat out of 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 an app to track your daily expenses so you know where your money is going. Then you can decide what to divert to your debt or savings.

While this may sound painful, cutting back doesn’t have to mean cutting out all pleasures. Some of the most effective ways to save are checking to see if money is leaking out in the form of plans you’re not using, or looking into insurance and cell phone providers.

With these strategies, you can reduce your spending and keep your avocado toast.

Keep calm and carry on

The NBER isn’t issuing a red “Don’t Panic” button announcing a recession, but they probably should. The reality is that most people won’t lose their jobs, wallets are likely to recover, and a recession won’t last forever.

If you’re already making good financial choices, stay the course, especially with your investments. In the words of Warren Buffett, “Be afraid when others are greedy and greedy when others are afraid.”

Stocks of all shapes and sizes are available for sale. During a recession, sticking to a dollar-cost averaging investment plan will be your best friend in the long run.

it comes down to

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 enable Portfolio Protection at any time to limit your losses.

You also don’t have to scour the headlines to see where each industry is headed. Powered by artificial intelligence (AI) technology, Q.ai does this work for you. It pools investments from different sectors so you can automatically put your money in a diversified group of assets.

Download Q.ai today for access to AI-powered investment strategies.

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