3 Things You Can do NOW to Prepare for a Possible Recession
It seems impossible to avoid the news of a possible recession. But as with anything when it comes to finances, the big question is…what does a recession mean for YOU?
Investopedia defines recession as “a period of declining economic performance across an entire economy that lasts for several months.” The last recession we experienced in the United States began in 2007 and ended in 2009 after the bursting bubble of the US housing market. Some would argue that we also had a recession in 2020, but the economic downturn that started in February only lasted until April of the same year.
These days, according to The Street, a possible recession could be because of a number of factors:
1. The Federal Reserve and higher interest rates
2. There was massive fiscal stimulus during the pandemic, financed by the Fed buying bonds
3. Rising input and wage costs
4. High oil prices
5. China Is decelerating sharply
But again, let’s go back to that key question: What does this mean for you?
Should You be Worried?
In a previous blog I stated, “Recessions are like forest fires – you need one to come through every so often to clear out the brush and allow for new growth.” When we’re faced with what feels like insurmountable problems, that’s when we get the most creative about solutions (like many people working from home now).
The big question is what will the underbrush be this time? What will the outcome be? I have a couple of guesses, but I put them in that realm – guesses.
Less dependance on commodities like oil.
I tongue-and-cheek say that ten years from now, we’ll be talking about how Putin solved global warming by driving up the oil prices. The higher the oil prices, the more interest that we have in alternative fuel sources.
The stock market will stabilize.
The stock market will be back in line with historical pricing standards based on corporate earnings. For the most part, we are already there, but things tend to overshoot on the way up and on the way down.
We will see changes in the labor market.
This one is a little tricky. My understanding of the technical definition of a recession is that the unemployment numbers need to increase above a certain number. This is really tough when we don’t have the same number of people entering the labor force as are leaving. We are going to have to innovate in order to fill this demand.
The pent-up spending by American consumers will end.
According to the May 23rd addition of the J.P. Morgan Guide to the Markets, consumer debit/credit transactions are up 34% compared to the same week 2019. This wasn’t a one-week blip. They’ve been tracking this for quite some time.
Recession-Proof Your Finances
The truth is that if you already have a solid plan in place, you’ve likely already recession-proofed your finances. Preparing for a recession is really just good overall financial planning.
1. Build up your cash reserve to three to six months’ worth of your expenses.
2. Pay down/off any credit card debt you may have. With rising interest rates, this is crucial.
3. Keep your eyes on the long term. This too will pass. Continue saving for your long-term goals and think of it as if you are buying on sale.
I remember one of my high school history teachers had a big sign on his wall: “Patterns in History Repeat Themselves.” The same is true of economics – recessions are a normal economic pattern. No two recessions are exactly the same, but they do tend to have similarities and 100% of past US recessions have ended in new economic growth – so we’ve got that to look forward to.
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