Is a recession coming? Some signs, such as rising interest rates and inflation, point to an impending economic downturn. If you are worried about your financial future, the best thing you can do is take a breath and make a plan. Check out our best financial planning tips for a recession to help you prepare and feel more in control of your financial situation.
What is a Recession?
In economic terms, a recession is a contraction in economic activity, such as a reduction in consumer and business spending and borrowing, a negative GDP, and rising unemployment.
Different events can cause recessions. For example, the recession of 1973-1975 was caused by a sudden economic shock from OPEC cutting off its oil supply to the U.S. The COVID-19 pandemic also delivered a sudden financial shock as businesses, schools, sporting events, and more shut down to stop the spread. The “Great Recession” of 2007-2009 was caused by the bursting of an asset bubble–real estate.
Currently, the U.S. faces the possibility of a recession triggered by too much inflation. We’ve seen the Fed make several interest hikes recently, with additional increases expected before the end of the year. The purpose of raising interest rates is to depress economic activity so that prices will come down. However, variables like the war in Ukraine and continued supply chain woes from the pandemic make it hard to predict how things will go.
At SkyOne, we began as a credit union serving the air transportation industry. We’ve helped pilots, flight attendants, and other airline workers weather previous recessions and industry layoffs. Now, we serve everyone throughout the United States through the Surfrider Foundation and Friends of Madrona Marsh. We understand that current economic conditions are challenging for everyone. Whether a volatile stock market has you worried about your retirement account or simply struggling to pay for gas, food, and other necessities, we are here to help. You may not be able to control what happens in the larger economy. Still, you can take control of your financial situation by learning to prepare for a recession, ride it out, and eventually come out even better financially.
Tips to Prepare Your Finances for a Recession
1. Increase your contributions to your emergency savings fund.
One upside with the federal interest rate hike is a likely increase in your savings account interest rate. So, it pays to keep more of your money in Savings, Certificates, Money Markets, or IRAs. You’ll grow your savings balance faster, which could be handy during a recession.
2. Pay down your debt as quickly as possible.
While you may earn a better rate on your savings, the cost of borrowing money, including carrying credit card debt, is also likely to increase. So, focus on paying off debt faster or paying more towards your debt balances with the highest interest rates. If too many monthly debt payments are dragging you down, consider a Debt Consolidation loan. You may also be able to save on interest when you consolidate multiple debts into one new loan.
3. Review your budget and cut out unnecessary expenses.
Unfortunately, rising prices may have already forced you to cut back on spending, such as take-out meals, restaurants and bars, subscriptions, services, clothes shopping, travel, and other discretionary expenses. However, cutting back on costs can also be a proactive step in recession planning by increasing your savings and decreasing spending.
4. Make sure your investments are diversified.
The more diversified your investment portfolio, the better your finances will be protected from risk during a recession. This includes stocks, bonds, physical real estate property, valuable assets, etc. Don’t stop investing altogether–one of the financial opportunities in a recession is to buy market shares at a reduced price while the overall stock market is down. Learn more in our blog article, How To Invest in Stocks: A Beginner’s Guide. And take advantage of our free financial counseling to assess your financial situation with an expert financial planner in California.
5. Have multiple streams of income working for you.
In addition to your full-time job, it’s a good idea to have additional income streams to diversify your cash flow. For example, a side hustle or rental property can produce extra income. You can also start by selling things in your home that you no longer use.
6. In times of mass layoffs, consider getting a recession-proof job.
Is your job recession-proof? Some safe industries to be in during an economic downturn include healthcare, therapy and counseling, law enforcement, public services, financial services, and education. While switching careers isn’t as easy as snapping your fingers, it may be something to consider, mainly if you get laid off and have an opportunity to pursue a different job or go back to school. For example, a national teacher shortage has led many states to loosen requirements for new teachers and substitutes, making it easier to switch to an education career during a recession.
7. Open a Roth IRA or consider a Roth conversion.
While traditional IRA and 401(k) accounts are funded with pre-tax dollars, lowering your overall taxable income, Roth accounts are funded with after-tax dollars, so your money grows tax-free and can be withdrawn tax-free in retirement. Unlike traditional IRAs, the Roth IRA has an earnings limit of $144,000 modified adjusted gross income for single investors and $214,000 for married couples. Converting a non-Roth account to a Roth enables you to sidestep income restrictions and save money on taxes. However, consult with your financial advisor first about your financial situation.
8. Keep calm and don’t make any impulsive decisions.
Recessions are difficult for everyone. It’s normal to feel anxiety or concern about the future. Instead of reacting impulsively to your worries, try to use this time as a period to learn how to manage your finances better and put these recession savings tips into action so you’ll be prepared for another economic recession or otherwise challenging time in the future.
We can help you prepare for a recession!
Boost your emergency fund with a high-interest savings account. Open a Sky-High Savings Account or Money Market Savings Account today! Are you wondering about the best retirement accounts to support your goals? Please schedule with our Wealth Management team today. Just need to talk to someone about your finances? Talk to a financial counselor for free.
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Thank you for reading this blog. We hope it’s helpful.
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