“Is a recession imminent for the economy?
I’ve been hearing this query a lot lately, just like many of you. One of the main points I try to make whenever a client mentions the possibility of a recession is that it has two different effects on people. Everyone is affected by the first method: as a consumer. Do your earnings increase or decrease? Can you afford your bills? More people than others experience this crunch.
The markets are impacted by a recession in the second way. If you’re an investor, you’re probably closely monitoring the market to determine how it’s affecting your investments.
For those who fall into both camps, it’s crucial to keep an objective perspective on a recession in order to avoid making irrational choices. Additionally, it’s critical to get ready as if a recession is imminent because, even if we don’t, taking precautions can give you peace of mind about your financial stability. But first, some crucial recession clarification.
How a Recession Is Tracked in Reality?
Although it may feel like a massive financial hurricane, we are unable to track recessions on radar or predict when they will hit the ground. In fact, because of the reporting lag, we frequently learn about recessions only after they have already occurred.
It happens occasionally long after we’ve gone through them. Just consider what occurred in 2020: The official announcement of the economy’s two-month recession from February to April 2020 didn’t come until July 2021. Most people would have expected that to be the case, but how many would have predicted that the recession would last for only two months?
This is due to the fact that a recession has traditionally been characterized as “two consecutive quarters of negative GDP growth,” and a recession typically lasts longer than a few months. The fact that the recession in 2020 was the shortest in American history was what made it so special; it was the result of unusual circumstances whose effects quickly ran their course.
I mention this because, despite any fear and worry you may experience when it seems like a recession is on the horizon, the terrifying roller coaster ride can end before you even realize it is going to. That isn’t always the case, and I don’t want to minimize the harm a recession can do to people personally. I simply want to set the stage for some crucial context for our larger discussion of this subject.
Continue Your Good Habits
In my experience, people tend to stop good financial habits in order to save up all their metaphorical acorns when they feel as though their financial security is in jeopardy. This might entail stopping 401(k) contributions and refraining from adding funds to their emergency fund.
As I’ve mentioned in previous posts, an emergency fund should be sufficient to cover your expenses for at least six months. It serves as an essential safety net for coping with unanticipated events, such as losing your job. Job loss is the defining feature of an extended recession. Initially, 1 in 5 people lost their jobs during the Great Recession, which lasted from December 2007 to June 2009.
Therefore, now is not the time to stop accumulating money for an emergency fund if the economy is headed for one (or if one is already underway but no one is aware of it). Additionally, if you can, this might be the ideal time to contribute more to your 401(k) than usual. Strong recovery periods typically follow recessions, and historically the market has produced positive growth. Take a look at what has transpired since the Great Recession ended in 2009 to demonstrate this: The S&P 500 has increased by 358 percent when dividends and inflation are taken into account (as of June 6, 2022).
Along with maintaining good habits, this is a great time to take proactive actions that will benefit you regardless of what happens next. The first step is to assess your spending plan, which I prefer to the more limited term “budget” for. Because it involves making decisions about how to spend your money, a spending plan is a symbol of freedom. Therefore, in light of a potential recession, it is wise to assess:
Do I wish to continue making the same decisions?
If my financial situation changes, will I have to make different decisions?
You have the option of making significant changes or making no changes at all. It’s important to note that you made that decision on purpose rather than letting events take you by surprise. Empowerment is essential for developing financial confidence.
Your credit is involved in the second action. Consider locking in any variable interest rates you have before anything else. You don’t want your interest rates to cause more confusion if a period of volatility is on the horizon (or responding to it). Second, if you own a home, you might want to think about getting a line of credit, like a HELOC. Although you are not required to use that credit, it would be convenient to have it on hand. Additionally, lines of credit will be harder to obtain if a recession is on the horizon.
Utilize This Chance
Although a recession is not a good thing, positive things can still come from it. There are actions you can take (and continue to take) that will position you to feel empowered even in uncertain times, regardless of whether we are currently in a recession or one is on the horizon.
Whether you’re still saving for retirement or have already retired, if you work with a financial advisor, get in touch with them to talk about your financial strategy. Reconsider your options instead of cashing out and stowing your money away. Check your plan to make sure you’re ready for all potential outcomes.
There will eventually be a storm. Why wait to construct your shelter?