Some experts think that rising interest rates and high inflation mean a recession is coming. As a result, many people are worried about their personal finances.
So, what can you do?
Start preparing now for a possible recession. Not only will you feel more in control. You will also be better positioned financially no matter what the future holds.
“Consumers can prepare for an economic downturn by taking smart steps to protect their finances and job prospects,” says Tim Schmidt, senior vice president and treasurer at Discover Financial Services.
Those steps include checking your budget more often, adding to your emergency fund, and paying off higher-interest debt (or consolidating it with a lower-interest loan). And if your job could be at risk, you might want to step up your networking efforts and build your skills.
You could also consider consulting a financial planner. But first, learn what you can do on your own.
Here are four strategies to help you prepare for a recession (or just fast-track your financial goals).
Table of Contents
- Understand what a recession is and what it means for you
- Review your personal finances
- Trim your spending and pay off debt
- Take stock of your job security and stay on your toes
1. Understand what a recession is and what it means for you
An economic recession is not always easy to define. Technically, a recession means there is a marked slowdown in business activity across the economy that lasts more than a few months.1 But many economists think of a recession as reduced growth for six months or more.2
Most consumers don’t care about the official definition, though. They are more interested in how a recession could affect them.
When businesses cut back production because of lower demand for their products, layoffs might follow. And when layoffs lead to cuts in household income, consumers tend to be more careful about their spending. Then demand for products goes down even more.
The current economic situation is a bit more complex. High inflation has led the Federal Reserve to hike interest rates in an effort to slow the economy and bring prices down.
“As interest rates rise, so too does the cost of borrowing, which reduces the demand for expensive items—such as homes and cars—that most people can’t afford to buy with cash,” notes Schmidt.
That’s why many experts think the economy may slow enough to slide into recession. And this possibility leads many people to worry about how they will pay the bills if they lose income.
2. Review your personal finances
Of course, anytime is a good time to take a close look at your finances. But with a possible slowdown coming, it’s important to do it now.
Many people find that talking to a financial professional can help relieve some of their stress. Recession or not, a certified financial planner can help you set goals and track your progress. For example, if you don’t know how you will cope if you lose your job, they can help you come up with a plan.
If you already work with a financial planner, set up a call to explore “what ifs?” Playing out a few scenarios will show you how long you can get by on your emergency savings. And you’ll be ready to act fast and adjust spending if you need to.
Even if you check your money picture regularly, it’s still a good idea to plan what you will do if your income takes a hit.
3. Trim your spending and pay off debt
Your budget won’t work if you expect to “set it and forget it.” If you’re concerned about a recession, take another look at your budget and think about ways to cut your spending.
“To protect their finances, consumers can trim discretionary expenses from their budget and may be able to lower debt service costs by refinancing or consolidating their loans,” says Schmidt.
You might even be able to cut back on living expenses. For example, if you’re part of a two-income household, see if you can get by on only one of those incomes.
Then add some of that money to your emergency fund. And hold off on big purchases (if you can) so you will have cash in the bank if your situation changes.
Because interest rates are on the rise, it could also be a good time to pay down variable-rate debt. One way to do that is by consolidating it into a loan with a lower fixed rate.
Just be sure to look for a lender that doesn’t charge prepayment penalties, like Discover® Personal Loans. This could help you save on interest in two ways: by paying a lower rate overall, and by paying the loan off early without any penalty if things improve.
To protect their finances, consumers can trim discretionary expenses from their budget and may be able to lower debt service costs by refinancing or consolidating their loans.– Tim Schmidt, senior vice president and treasurer, Discover Financial Services
4. Take stock of your job security and stay on your toes
If you work in a job or industry that could be hurt by a recession, keep your ears to the ground about cutbacks. Start networking so you can stay in the know about changes in the marketplace and get ready to make a switch if necessary.
You could also look for a second job or side hustle. The extra income could help bridge the gap if you are laid off from your job.
It’s normal to worry about a recession. But it can help to remember that it’s a part of every economic cycle. And it isn’t always severe or long-lasting.
Whatever happens, you can take steps now to trim spending, add to your emergency fund, and pay down debt. And you can always ask a financial professional if you’d like more specific advice. If a slowdown does come, you will be relieved to know that you can weather the storm.
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