Getting nervous about all the economic turbulence in the news lately? You’re not alone. According to a release from the Conference Board, “Consumers’ expectations were especially gloomy, with pessimism about future business conditions deepening and confidence about future employment prospects falling to a 12-year low.”
Much of this has been due to the recent stock market decline. Throughout March, the S&P 500 was down as low as 10% from its recent high. That puts it into correction territory for the first time since 2022.
By itself, a correction is a normal part of the economic cycle. However, the fear is that it’s a slippery slope towards a recession. Recessions are technically defined as a significant decline in economic activity that is spread across the economy.
Classically, recessions were characterized as two consecutive quarters of negative GDP growth. However, the definition has since been updated by NBER (the National Bureau of Economic Research, a non-profit organization that officially determines recessions) to include income levels, employment data, and other key economic indicators.
It’s not just consumers who are worried about a recession. A March CNBC Fed Survey increased the recession probability from 23% to 36%. J.P. Morgan’s chief economist also suggested the odds could be as high as 40%
So what does this mean for your money? Whether we’re heading for a recession or not is anyone’s guess. At the same time, it’s always a good idea to review your overall financial health and put some protective measures in place if a storm should appear. Here’s what to do.
1) Trim Your Budget
Recession or not, everyone should periodically take a moment to audit their purchases. Chances are that if you went through your credit card or bank statements line by line, you’d find there were several impulse purchases or transactions that were outright unnecessary. Similar to a healthy diet, it’s important to stay conscious of how you’re doing and make changes to your spending habits when needed.
Budgeting apps like Buxfer can often help streamline this effort. Buxfer connects to your financial accounts and consolidates the information in real time to one convenient dashboard.
2) Build Up Your Emergency Fund
Again, in both good times and bad, everyone should have money set aside for a rainy day. It’s not a question of “if” something bad will happen, but “when.” The arrival of an unexpected medical bill or a major auto repair only seems to occur when you least expect it. During a recession, this can be further complicated by a reduction in hours, a pay cut, or even a potential job loss.
For these reasons, it’s strongly recommended by many financial enthusiasts to create an emergency fund with three to six months’ worth of living expenses. This should be saved in an account that’s highly liquid and separate from your regular finances. A good choice is a reputable online high-yield savings account that pays you a respective interest rate. That way your money is still working while also serving as a safety net.
3) Delay Major Purchases
Thinking about buying a new vehicle, remodeling the kitchen, or taking a luxury vacation? Those are all fun purchases, but you might want to pause before you open your wallet.
If you truly think that the economy may fall into a recession, then having plenty of cash reserves and maximum cash flow will be essential. Therefore, you may want to pump the brakes on committing to any major purchases.
That doesn’t necessarily mean you aren’t allowed to do anything. Instead, opt for more ventures that are more budget-friendly. For example, instead of that major home renovation, why not update the landscaping instead? By comparison, it will be less expensive while still adding years of beauty and curb appeal.
4) Prioritize Your Debts
Speaking of cash flow, if there are any outstanding balances you can get rid of, now might be a good time to strike.
Two very popular strategies you could consider are the debt snowball and debt avalanche methods.
- The snowball method prioritizes paying off your smallest balances first
- The avalanche method focuses on eliminating high-interest debt first
Regardless of which route you choose, what’s important is that you’re systemically getting rid of your balances one by one.
5) Keep Your Credit Score High
Though new debt should be avoided, there’s going to come a time when you have no choice (such as moving to a new house or buying another vehicle). When that happens, you’ll probably want (or need) to finance rather than drain the cash in your emergency fund. For this reason, you’ll want your credit score to be as high as possible.
Your FICO Score, the most popular type of credit score, has a range of 300 to 850. The closer you are to 850, the easier it will be for you to qualify for new lines of credit such as a new credit card or loan. Even though you can still get approved with a mid-level score, your rates and terms will most likely be better with a greater credit score.
To make this possible, take action to improve your credit:
- Start by looking up your FICO Score. Do this for free through Experian, Discover, Capital One, Citi, and many other financial institutions.
- Download your credit reports. Copies are available via one of the three major credit bureaus (Equifax, Experian, and TransUnion) or a credit monitoring service.
- Continue making regular payments. A large portion of your FICO Score is simply paying your bill on time. Setting up auto-pay can make this a breeze.
- Keep your credit utilization low. FICO likes to see you use less than 30% of your total available credit.
- Don’t let anyone run your credit. Pulling a credit report too many times in one year can negatively influence your rating. Therefore, reserve it only for as-needed occasions.
6) Have a Fall-Back Plan
Although most people continue to remain employed during a recession, it’s not a bad idea to consider your career prospects if your employer decides to do the unthinkable. A good place to start is to simply revive your resume. Update it with any new projects, certifications, or accomplishments you’ve acquired. Don’t forget to also make those same updates to your LinkedIn profile.
Additionally, you may also want to consider learning a new skill. This might help you to stand out from a crowd of potential applicants. It could also lead to other job positions or even an eventual career change altogether.
As far as your finances go, determine what additional steps you might take if you ever have to go into financial crisis mode. These might include withdrawing contributions from your Roth IRA or borrowing against your 401(k). Giving this some thought now will allow you to approach the question with logic and care as opposed to the emotional reaction you may have once you’re in a stressful situation.
7) Don’t Stop Investing
It can seem like a bad idea to continue putting money into your 401(k) or investment accounts when the economy is heading for trouble. Yet, the irony is that it’s actually the best time. After all, the old investment mantra is to “buy low, sell high.”
For this reason, don’t stop what you’re doing. Continuing to save takes advantage of what’s called “dollar-cost averaging” – a strategy where you make regular periodic investments regardless of how the markets are doing. Because no one (and I mean no one) can time the market, it doesn’t pay to sit on the sidelines and wait for the perfect opportunity. History has shown that those who contribute in regular intervals naturally buy up assets at a discount that later appreciate when the markets eventually begin to climb.
In short, just stay the course! Unless you’re Warren Buffett, don’t try to convince yourself that you can outsmart the market. Continue to be disciplined and committed to long-term, gradual growth.
Featured image courtesy: Unsplash
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