Just hearing that word can cause some people to clench their teeth, clutch their chest, and run to the bank. With crazy high inflation, the gas that’s around $5, and rising interest rates, you’ve probably heard rumblings that an economic recession is looming.
So, is a recession coming? And if it is, how do you prepare for a recession?
Well, it’s a good idea to have your finances in order—always. But we’re here to tell you how you can be prepared and not go off the deep end. So, relax. You don’t need to build a bunker, stuff a pile of cash under your mattress, or stock up on toilet paper.
Bottom line? Don’t freak out! Here’s how you can make sure you’re prepared for a recession, whether one is coming or not.
What Is a Recession?
Be honest: You were thinking it. If it’s been a hot minute since you’ve been in an economics class, we’ll get you up to speed.
The National Bureau of Economic Research says a recession happens when there’s a “significant decline in economic activity spread across the economy and lasts more than a few months.”1
Or in non-professor terms: The economy is in a funk.
Economic growth is measured by GDP (gross domestic product), which is the total value of all the goods and services made and produced by the American economy. Normally, GDP grows little by little. Recession is just a big word to describe when GDP is negative for two quarters—or, in other words, GDP stops growing for six months.
Are We Going Into a Recession?
Recessions are kind of like tornadoes. It’s hard to predict when they’ll hit and how much damage they’ll cause. But instead of downed trees and smashed houses, the damage from a recession usually looks like this: lost jobs, a tanking stock market, and bankrupt businesses.
Now, you might not personally feel the effects of a mild recession (though you’ll definitely hear about them in the news 24/7). But a moderate or severe recession will definitely get your attention.
America’s last recession came and went super quick in 2020 when the whole world shut down in response to the coronavirus pandemic. The National Bureau of Economic Research didn’t even wait for two-quarters of negative GDP growth to declare a recession. (Yep, that bureau is responsible for telling us when we’re in a recession.)
So, are we going to have a recession?
Wondering why we’re being so matter-of-fact about the whole thing? Well, recessions are a natural part of the economy, so it’s a given that we’ll have them from time to time. We’ve actually had 12 recessions since World War II, and the average length of each was about 10 months.2
So, the real question isn’t if we’re going to have a recession but when we’re going to have one, and that’s more difficult to answer. But we have seen some signs that a recession could be coming.
Sometimes the signs of recession are super obvious (cough, COVID shutdowns, cough). But others are more subtle. People who study the economy for a living even disagree over when the U.S. will have its next recession.
We said earlier that a recession is usually defined as six months of falling GDP. So, here’s the bad news: GDP declined by 1.4% in the first quarter (aka first three months) of 2022.3
Now, that might make you think, We’re halfway to a recession! Well, maybe . . . or maybe not. Other economic indicators like consumer spending and unemployment are still doing okay.
But then there’s the big thing on everyone’s mind: inflation. We’ve all felt the effects of higher prices, and that’s why the Federal Reserve (the U.S. central bank) has started raising interest rates to try to slow inflation. The Fed is stuck between a rock and a hard place because rising rates slow GDP growth and could push the economy into a recession.
Oh, yeah, and in case you haven’t noticed, the stock market has been in a nose dive lately. Wow, that’s a lot to worry about.
With that being said, it’s always good to be prepared as if a recession was coming.
How to Prepare for a Recession
With inflation up and our retirement accounts down, a recession feels more real now than ever. Having concerns right now is valid. But it’s important to not give in to all the fear out there. You should instead focus that energy on making sure your finances are where they should be.
At the end of the day, you need to have your own house in order and ready to stick it out during a recession. That’s going to matter a lot more than what’s happening on Wall Street or at the White House.
So, recession or not, our proven plan is still the same: Live on a budget, pay off debt, save for emergencies, invest for retirement, and live and give like no one else.
If You Have Debt . . .
If you have a steady job that’s secure right now, then keep working your debt snowball and paying extra on your debt just like you’ve been doing. Being debt-free will give you an overwhelming sense of freedom and peace. And when you aren’t spending most of your paycheck on debt payments, things like higher grocery prices—or a dip in the stock market—may not hurt as much.
If you’re out of work or have a potential job loss on the horizon, go ahead and pause your debt snowball. Listen—we get it. After all your hard work, it probably hurts a little to read that, but for right now, you’ve got to prepare for a storm. Make sure you cover your Four Walls first—that’s food, utilities, shelter, and transportation—and stockpile some cash. Stop paying any extra payments toward your debt, but do continue to make the minimum payments if your Four Walls are covered (so your debt doesn’t go into default). The most important thing is to take care of yourself and your family.
And remember, no matter how scared you might feel if you lose your job, don’t take on more debt. You’re already in a rough patch, and debt is only going to make it worse and leave you in a pinch down the road. Debt is dumb—even when you’ve lost a job, even when you’re scared, and even in a recession.
If You’re Saving . . .
Keep saving! Having an emergency fund is never a bad idea. Think of it this way: If a recession did happen, you could rest easy knowing you have your emergency fund in place. Your emergency fund is the buffer you need to have between you and life all of the time, not just when there’s talk of a recession.
And right now is the time to make sure your dollars stretch even further. If you’ve been kind of, sort of budgeting all along, buckle down and give every single dollar a job to do by making a zero-based budget. Download our free budgeting tool, EveryDollar, to get started.
If You’re Investing for Retirement . . .
When the stock market goes down, you might be tempted to sell your mutual funds at a loss and put the money into something safe to weather the storm. But hold on, take a breath, and don’t do anything out of fear. We say it time and time again: Investing is a roller coaster ride, and you don’t want to hop off the coaster while it’s still going!
Before you decide to pull your money out, please consult with your financial advisor. It may be best for you to wait.
Stocks are basically on a huge clearance sale right now. That means if you keep investing, you’ll be buying stocks at crazy low prices. And when the market picks back up (and it will), you’ll still be on that roller coaster, smiling as you see the big returns roll in from your “sale” stocks.
Above all, remember that investing for retirement is a marathon, not a sprint! And don’t pull your stocks out just because some dude on the news told you to do it.
If you’re feeling stumped when it comes to investing, connect with Mike Mead who can help you make good investment decisions and talk you through your options.
Get Your Own Personal Economy in Order
Remember, a recession means the economy as a whole has been in a slump for six months or more. And at this point in the game, that hasn’t happened yet. But what is happening is your life. The money decisions you make every day impact you more than anything an economic expert could predict.
What have the last six months been like at your house? Think about it. Have your finances been in a recession of their own due to inflation or something else? If you’ve had a bad break, now is the time to really dig in and get serious. Don’t wait for a recession to hit before you get your money in order. Get intentional about how you handle your money now.
Maybe you don’t even know where to start. Sure, it’s easy to spot a red flag and know things need to change, but it’s hard to figure out exactly how to make it happen. So set aside three minutes to sit down and take our free assessment. Just answer a few questions about your money habits and it’ll get you started with a plan you can put into action today. You can do this!
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