Preparing for a recession

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77% of American adults believe a recession is coming in 2022, but few understand what that will mean for our everyday lives. Barry Bigelow shares exactly what people need to know when preparing for a recession.

The technical definition of a recession is negative economic growth for two consecutive quarters, which is measured using the gross domestic product (GPD). Many people associate recessions with the stock market crashing, which often happens, but in reality recessions affect every area of the economy. A recession can include businesses closing, supply shortages, decreased spending, banks failing and high unemployment rates. As scary as it can sound, recessions are a natural part of our economy; there will always be times of growth and decline.

The Great Recession that started in 2008 was largely caused by bad credit in the housing market and bad bank balance sheets, and the recovery took years. Our current economic struggles are different, and the majority of economists (63%) are still hopeful the Federal Reserve’s interest rate hikes could calm our inflation crisis without pushing us into a recession. The Fed’s interest rate hikes might overcorrect, though, and push consumer spending and borrowing down too much. The job market is booming, with an unemployment rate of only 3.6%, but experts worry the high wages and benefits companies are offering to get new hires will drive inflation higher. On Wall Street, we’ve been seeing volatile markets all year and supply chain issues have only been emphasized by the conflict in Ukraine and ongoing Covid-19 issues. With all of these factors, a mild recession might be coming, so it’s important to have a financial plan that can withstand a recession.

We should prepare our finances in a few different ways, the first being to plan for your expenses. Start by having a clear understanding of what amount of money you need to live off of. Add up your necessary expenses like housing, food, utilities and transportation to get a better picture of how much income you need to be generating. Since it’s hard to know how long a recession will last, I recommend making sure you have enough liquid assets to account for three years of income. That means money you can immediately have access to, like cash or a savings account. Your liquid accounts should also include emergency savings, which is 3-6 months worth of expenses set aside for emergencies like potential layoffs that can happen in a recession.

The next tip is to understand your season How you should prepare for a recession is largely dependent on what season of life you’re in. Ask yourself, how close am I to needing my retirement dollars? If you’re 10 or more years away from retiring, a good plan of action is likely to hold steady and wait it out, because historically we know recessions end and give way to a period of growth. For those with time on their side, investing more dollars while the market is low will allow you to capitalize on major gains when the market is back on the upswing. It might mean forgoing a vacation or big expense this year, but it’s wise in the long run to invest in a down market.
If you’re five years out from retirement, you’ll likely want to move your investments where they’re less volatile and reallocate funds from any high risk investments.

If you’re in retirement and using those dollars, Barry recommends segmenting. You should have income for three years in liquid assets, like cash or savings accounts, to make sure those dollars are accessible for your immediate expenses. Other investments should be put into low-risk investments that can still realize some gain, even while the markets are down, without putting your money at risk.

We can’t predict the future, but we can look to the past for more information. The average length of a recession between 1945 and 2009 was 11 months. There’s no exact timeline for a recession, but there are a number of triggers that can bring us out of one, depending on what started the downturn in the first place. Getting inflation under control, filling jobs without inflating wages and getting interest rates to normal levels will help our economy return to normal, all of which take time. Keep in mind we’re in a world-wide economy now, so what happens in Ukraine and other parts of Europe affects our economy in America. It’s impossible to predict when and for how long a recession will hit, which is why it’s important to have a financial plan to withstand economic downturns.