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A little planning and tweaking can help us navigate these times a little more easily.
You can’t turn on the news these days without talk of a potential recession. Some experts say we’re already in one. Some say we may be able to dodge it. And others are unsure where we’ll end up. Hearing about inflation has been stressful enough. Add a potential recession to the mix, and it’s not doing us any favors in the anxiety department. The good news is that experts agree this market uncertainty is nothing to panic about. A little planning and tweaking, they say, can help us navigate these times a little more easily.
While recent economic numbers point to certain strengths in our economy — like a low unemployment rate and surging wage growth — inflation is still top of mind when it comes to a possible recession. “A recession is defined by two consecutive quarters of declining GDP, or the market value measure of all the goods and services a country produces in a specific time period,” explains Mark Henry, founder and CEO of Alloy Wealth Management. “When the economy goes into a recession, things contract. The stock market starts to decline, home sales go down, and income and spending struggle to keep up with inflation. Inflation, rising interest rates, and fears of a possible recession make investors nervous about the future.”
As for what has been inching us closer to recession, the reasons are many. Eric Brotman, the CEO of BFG Financial Advisors and author of Don’t Retire … Graduate!, explains that having the government stimulate the economy and print more money, like it did with relief funds during the height of the pandemic when many people were struggling to make ends meet, was one of many factors that may have contributed to the current economic position. Also, supply-chain issues have likewise impacted prices due to supply and demand. When there are less things to buy, consumers typically pay a premium to get what they want, which results in companies and businesses inflating prices to keep up profits on popular products.
What consumers need to know about this is that it can lead to inflationary pressures and impact the job market. “So right now, there’s been an enormous amount of unfilled jobs because of what’s been called the Great Resignation,” explains Brotman. “Employees currently have the power to go find another job at another company and get a big raise just because no one’s out there looking for jobs and there are jobs to fill,” he explains. But if a recession strikes, companies may either downsize or stop hiring.
The U.S. government has taken steps to curb inflation with, as Brotman notes, “the Fed recently raising interest rates in an effort to slow down inflation.” When interest rates go up, borrowing money gets more expensive, and spending tends to go down overall, which, in turn, should theoretically help prices even out.
Even so, this is still a wildly uncertain time. So, as we wait it out, here are a few tips from finance experts on how to weather the storm.
You’ve been back out to the theater, enjoying concerts, and are fresh off a family vacation. While it’s tempting to continue shaking off the days of that 2020 isolation by living large, Brotman says it’s time to rein it in for a while. “Step one is to drop your discretionary spending,” he explains. “Anything you don’t have to spend, don’t spend right now. Give yourself some grace for six or 12 months.” Brotman says now is the time to ditch the expensive dinners for cooking at home, to embrace local hiking trails and beaches, and to cut back where you can. Check local publications for free festivals and events in your area, have a movie night at home with Netflix versus splurging at the cinema, and find fun excursions to partake in via websites like Groupon.com.
“If you have debt with a high or variable interest rate, make it your sworn mission to get rid of it, because it’s going to get more expensive,” says Brotman. Lines of credit and credit cards, for instance, have rates that will keep going up, and it’s going to get more expensive to have debt. If you have fixed debt at a lower interest rate, like a mortgage around 3 percent, however, leave that alone. “Because there will come a time where I believe you’ll be able to earn 4 or 5 percent in a money market while you’re paying 2.5 percent percent on your mortgage, and you’re actually making money by borrowing money,” Brotman explains.
During a recession, interest rates on a home loan or financing a car will likely cost more. The good news, says Brotman, is that interest rates will also be higher for savers. “You’ll start to see a decent rate of return on things like certificates of deposit or short-term bonds, maybe even money markets.” Twenty years ago, it was not uncommon to see a 5 percent money market return or an 8 percent CD return. But in the last five to 10 years, they’ve been near zero. “So, it was cheap to borrow but fruitless to save,” he explains. “Now it will get expensive to borrow and fruitful to save.”
If you’re in a position where you’re still able to participate in a company retirement plan or there are other investments that you’re doing, continue to do so, says Brotman. “Nobody yet knows if we’ve hit the bottom of the market, but if you’re contributing to something like a 401(k) every month, don’t stop.” In the event of a recession, you’ll eventually be buying things at a discount, and when they go up, this will benefit you financially.
If you don’t have a good handle on your spending, now is the time to get some clarity in that department. “Even if you’re not experiencing financial woes, start paying attention to what your budget is, and start paying attention to what your savings look like and what you’re spending money on,” says Tom Smith, a professor and economist with the Goizueta Business School at Emory University. You can track your spending with apps like Mint, create an Excel spreadsheet, or even jot things down in a notebook. Once you have an idea of where your money is going, Henry suggests doing a deep dive into your expenses to decide what you can cut. “How many times do you go to Starbucks? Can you make fancy coffee at home instead? Are you only shopping at Whole Foods? How many nights are you eating out? Are you going to shop somewhere else? Can you put off that new car purchase or wait to add on the fence to the backyard?”
Smith continues, “But the key is, it doesn’t matter if you track if you’re not willing to do something once you’ve tracked it. So, if you say, ‘I can’t believe we spent $600 on entertainment last month,’ okay, well, then turn that into $500 next month, then $400 the month after.”
One great way to find hidden fees, says Smith, is to look at what you are auto-paying for monthly. Can you go from six streaming services down to four? Do you need all those magazine subscriptions? “There’s a newspaper from my hometown that I subscribed to in order to read about the high school football team that I haven’t bothered to cancel,” he says. “Or I haven’t been paying too much attention to baseball — I should probably cancel my ESPN+ baseball package.” These things may seem petty but can add up to a few hundred bucks of savings each month, Henry stresses.
If it is at all possible in your life, take on extra shifts at work, and look for overtime opportunities if they’re available at your current job. Or there’s always a side hustle. “Consider getting a part-time or second job to bring in some extra income,” says Henry. If you get laid off, he suggests taking action as soon as possible: “Rework your résumé, start looking through job listings, and reach out to any professional connections you might have.” Seek a part-time job so you can keep some money coming in while you look for something full-time. “Don’t be afraid to get out of your comfort zone and try something you’ve never done before. Drive for Uber or Lyft; deliver pizzas or groceries,” says Henry. Any money coming in is money you didn’t have before.
“If you have an emergency fund, don’t be afraid to use it,” says Henry. “A situation like this is exactly what it’s there for.” He explains that the worst things you can do in tough financial times are to go further into debt for things that aren’t absolutely necessary or use credit to pay for expenses you can’t afford to pay back, and that it’s better to dip into your emergency fund than rack up new debt. If you’re carrying credit card debt, Henry says to consider looking for some 0 percent balance transfers. “Consolidating debt is never the answer to get you out, but it can help in dire situations,” he explains.
Nicole Pajer is a freelance writer who has contributed to The New York Times, AARP, Woman’s Day, Parade, Men’s Journal, Wired, and Emmy Magazine. Follow her on Twitter @nicolepajer.
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