Is a recession likely? Well, despite the grimness of the large-scale financial picture, there’s good economic news out there. Nearly all the jobs lost during the pandemic are back and employers are still hiring. Months of stimulus checks and zero commuting costs drove down debt and boosted savings. Stir-crazy Americans are traveling, staying at hotels, and going to restaurants. Money’s moving.
But while we’re spending more, we’re getting less. Runaway inflation, sky-high gas prices, and plummeting stock and cryptocurrency markets overshadow positive economic indicators. As Federal Reserve Chairman Jerome Powell hikes interest rates to curb inflation, the employment rate is at risk and the vibe’s gone bad. Consumers and investors are hurting.
“There's no question in my mind that we’re in a recession,” Howard Dvorkin, Chairman of Debt.com and personal finance guide, says. “Maybe the economic and technical definitions of a recession haven't hit yet but we're there.”
If a recession is indeed imminent, it’s far better to be prepared than surprised. So, what should you do to prepare for a recession? We asked financial advisors and other experts for their advice for weathering the storm. They recommended a variety of tactics from, scaling back spending and building up savings (both easier said than done) to looking closely at debt and using any losses to your advantage. Here’s what to consider.
1. Build up Your Savings
Remember the old adage about trees: the best time to plant one was 20 years ago. The second best time is today. The same applies to savings. Sock away as much cash as you can, starting now. And when we say cash, we mean just that: flat currency, not investments or assets. Financial advisors generally advise building emergency funds that can cover at least three-to-six months’ worth of expenses, a concept that will seem like wild science fiction if you’re living paycheck to paycheck. Nevertheless, if you have no savings, it’s imperative that you start saving now. And if you have some savings, save more. “If you're at three months, you may want to be closer to the six-month range in the event the economy slows down and you lose your job,” Kansas City, MO financial planner Kyle Hill says. “It may take longer than before to land a new gig.”
2. Trim Spending
With the rising cost of consumer goods, your paycheck seems stretched as far as it can go. While it may seem impossible, you need to find ways to spend less. “Look at cutting some discretionary expenses to create more margin in your budget so you can put more money away,” Hill says. It probably doesn’t seem like you’re spending frivolously. But dig in. Pull out your credit card bills and search out recurring charges. Are you subscribing to multiple streaming services? Cut it down to one for a few months. Are you buying lunches every workday? Plan ahead and pack meals. How often do you buy alcohol? Even if you cut back on discretionary spending for a few weeks, it can make a noticeable difference.
3. Tackle Whatever Debt You Can
Credit card balances are like black mold. They’re easy to wipe away when they’re small but rot away everything they touch if you let them grow. It’s tricky business to build up an emergency fund while paying down debt, sure. Direct as much money as you can today towards paying off consumer (I.E. non-mortgage) debt, with a special emphasis on debt with variable rates that are likely to rise as the Fed tinkers with interest rates.
4. Invest for the Long Term
If you have enough cash on hand to cover six months or more, start looking further into the future and use today’s economic conditions to your long-term advantage. Quick caveat: as Berkshire Hathaway billionaire CEO Warren Buffett famously warned, it’s impossible to time or beat the market. Nevertheless, it might be time to consider opportunities for buying low today and selling high far in the future.
“If you max out your Roth IRA now, the same funds that you would have invested in at the beginning of the year are now 20%, or more, cheaper in many cases,” Hill says. “That means you get more shares for the same dollar amount compared to the beginning of the year.”
It’s not a sure bet. The market may sink lower before it bottoms out and bounces back. But, as Hill notes, over the long term, the market historically has an upward trajectory. “If you're 30 and saving for retirement, the market is most likely going to be worth more when you get to retirement than it is now,” Hill says.
5. Re-Consider Your Investment Mix
For the last decade, the stock market has boomed away like an Ibiza dance floor DJ, keeping hands in the air for exciting investments that would double, triple or more overnight. That party vibe has taken the shine off of more conservative assets. If you consult a financial planner, they might say that it's an excellent time to revisit your stock-to-bond mix in your 401(k) or other investment accounts.
“I'm not necessarily advocating for becoming more conservative, particularly because the market has already declined, but it is worthwhile to revisit if you want to be more conservative at some point in the future,” says Wisconsin financial advisor Elliott Appel.
6. Harvest Investment Losses for Tax Gains
Maybe the mutual fund you had such high hopes for didn’t take you to the promised land. In fact, it lost a considerable amount of money. Nevertheless, it can still do you some good come tax-filing season. “If you've invested in the market, take your tax losses now,” Dvorkin says, noting that tax filers can take up to $3,000 against ordinary income in losses. He also notes that there can be tax advantages for converting tax-deferred traditional IRA accounts into taxable ROTH IRAs, where owners pay tax, in down markets where you’re filing losses. Please note that this is a risky maneuver, so proceed with caution and with the advice of a tax professional if you attempt it.
7. Become the Employee Your Next Job Needs
If you think that layoffs are looming, don’t waste time worrying about losing your current job. Put that time and energy into getting your next job. Bulletproof your resume with new skills and useful credentials. If you’re north of 35, this is especially important because older workers earning higher salaries are generally more vulnerable to layoffs than their younger, cheaper counterparts. There’s a wide variety of online classes, courses, and boot camps available. But whatever you choose, start as soon as possible. “Upgrade your skills before something happens, not after,” Dvorkin says. “It takes you time to learn skills.”