An anti-budget approach for the potential recession
We may or may not be headed into another recession. Here’s how you can prepare financially for whatever the economy does next.
From our founder: Dana Miranda is a Certified Educator in Personal Finance® and founder of Healthy Rich. She’s written about work and money for publications including Forbes, The New York Times, CNBC, Insider, NextAdvisor and Inc. Magazine.
Are we… in a recession? Or were we? Or is there a recession coming?
Recession talk this year has been confusing because a clear threshold for a recession doesn’t exist. The National Bureau of Economic Research (NBER), the independent organization that officially tracks business cycles in the U.S., loosely defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
The popular recession definition you’ve probably seen from various media is: two consecutive quarters of negative gross domestic product (GDP) growth. By that definition, the U.S. hit a recession in the first half of 2022. But the White House pushed back on that — no surprise that they’d rather not have a recession on record in an election year — and cited the NBER tracking that didn’t record or forecast a recession.
Plus there’s that little detail of historically low unemployment, hanging out at 3.7% as of October 2022.
So…? Cue deeply confused shoulder shrug.
So, the headline here is most of us should stop tracking daily news about the state of the economy. Economists can’t predict a recession with certainty. And whatever’s happening now is unusual; even if we dip into an official recession, economists seem befuddled over what it’ll mean for the average household.
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This is not the Great Recession
The word “recession” in headlines is pretty scary for a lot of folks, especially millennials, whose adult experiences of recession include the 2008 housing collapse and the 2020 pandemic — both historic catastrophes.
Recessions aren’t always like that.
A recession is an inevitable swing in the capitalist business cycle. The economy expands with inflation (as it is now) or speculation (as in the dot com boom), as businesses earn more, pay more and employ more people. Then hits a tipping point and needs to contract, a recession. (Economist Richard Wolff offers a great explanation of this inevitability on the podcast Economic Update.) The NBER has dated a dozen recessions since it began tracking them in 1948.
What could happen to your money during a recession
Investment advisors and economists look at all kinds of trends to determine the health of the economy.
The rest of us? We just keep an eye on a few things that impact our day-to-day lives.
Unemployment: When companies can no longer charge high prices and sell stuff for high profits, they lay people off. Unemployment is low now, as is typically the case before a recession, and it tends to climb throughout a recession. Most advice on preparing for a recession is about preparing to be without income in case you lose your job.
Increased interest rates: The Fed has been raising its interest rate all year, which affects the rate you pay on a mortgage, loans and credit cards. That means your monthly payments for those products are likely going up. When inflation breaks into recession, the Fed tends to drop rates back down; but for now, you’re probably dealing with more expensive debt.
Stock market values: When corporate profits drop, their stock values drop. Stock values also go down when demand goes down, which is why the market has been so volatile this year — investors (actually, investment firms) get spooked by inflation and interest hikes and pull back. With a nationwide retirement plan relying on private investment accounts, stock values can affect your livelihood in retirement.
A lot of other nuanced stuff happens; it’s mostly over my head. But these potential effects are the ones that matter to most people on a micro level.
Say more about investments…
Drops in the stock market are typical during a recessionary period. Stock market values rely largely on the values of the companies those stocks represent, and those values go down during a recession when the companies produce less and people buy less from them.
Market values — measured along indexes like the S&P 500 — usually trend along with other indicators of a recession. They’ll drop when a recession starts and stay low while unemployment rises and GDP stays down, and they’ll recover as those other indicators flip.
The value of your investment accounts — including a 401(k) or other retirement savings — is bound to drop when the market does. If you’re paying close attention to your balances, that’s scary.
Most experts tell you not to watch your accounts too closely so you don’t get spooked. If you depend on investment accounts for long-term savings, keep contributing at the same pace, and historical stats show you’ll be better off once the market recovers. Plus, if you buy in when stock prices are low, your gain is that much better when their values go up.
If you plan to retire in the next five to 10 years, that advice isn’t helpful. You likely have a lot of money stashed in your retirement account and don’t have time for the value to recover.
Work with a financial planner if you’re that near retirement. Regardless of the economic forecast, their job is to help you figure out how to use your retirement savings to live after you leave work, and they should be shoring up your accounts with less volatile investments as you get closer to your planned retirement — precisely because of the risk of a recession or other fussiness in the markets.
Check out our list of women in personal finance to find a financial planner who’s not a douche.
More ways to prepare for a recession
Imagine a recession is coming. How should you prepare?
1) Don’t panic. 2) Practice the same budget-free money management steps that help you live with ease and joy in any economy. Here’s how to apply them to prepare for a recession:
Check your mindset. Are you reacting to recession forecasts in fear without understanding how the economy will actually impact your life? Check in on your relationship with money to understand where your response is practical and where it’s emotional.
Assess your situation. Take an inventory of your income, resources, financial commitments and goals to see where you stand. How could a change in costs or income impact your life? Where do you have influence and control to guide that impact?
Ask for more money now. Like I mentioned in the piece on how to deal with inflation, workers are in a good position to ask for a raise and better benefits and working conditions. When corporate revenues contract, that’s going to be harder. Take advantage now to increase your income, so you can deal with higher prices and have room to build a cushion for the recession.
Diversify your income. If you’ve been thinking of venturing into freelancing and self-employment, this could be a good time. Working for yourself protects you from the whims of an employer, and doing client work lets you get income from multiple sources and even across sectors, so one cut budget doesn’t dash your whole income. Even adding a side gig, if you have the bandwidth, can give you something to fall back on if you lose a full-time job.
Look into other resources. Take the pressure off your individual ability to protect your income by adding other resources to the mix. Know your options and the processes for unemployment and other government benefits before you need them; and get familiar with local food banks, libraries, thrift stores and charities that can give you wiggle room now and offer a safety net in case your circumstances get worse.
Build a comfort fund. A store of cash can quickly ease the stress a recession could bring. If you have room for saving now, focus on putting away enough to feel comfortable with however you expect a recession to affect you.
Check your debt. If you’re paying off credit cards or loans, is there anything you can do to lower the monthly payment or reduce your liability? Consider a consolidation loan for credit cards, and apply for income-driven repayment for federal student loans. If you take out a mortgage, consider how the monthly payments will feel if your circumstances change in the next few years. Talk to your family now to set a threshold for filing bankruptcy so you don’t have to make decisions in the midst of desperation in the future.
Consider alternative savings plans. Stock market volatility is only scary if you rely solely on investments for your long-term security (and that includes investments in so-called safer assets like real estate and gold, whose values also fluctuate). Our society doesn’t offer a lot of viable alternatives, but I encourage you to get creative if you have the tolerance. Examples: Building and selling a business could be a joyful retirement plan. Investing in a local small business could be a generous one. Peer-to-peer lending can put your funds to better use than lining corporate coffers.
I’m not saying a recession is coming this year. Or that we’re in one. Or that your life is about to be ruined. Or that it’s your responsibility to pick up the pieces if it is.
But many of the steps you take to protect your livelihood against a recession are ways to cushion your life against the worst parts of capitalism and budget culture in general. So if you’re feeling unsettled about our economic prospects, it’s a good time to evaluate your relationship with money and take these steps to find some peace with it.
Image by @Yemster via Nappy
Thank you for your work! You are making money less scary and I appreciate that so much!
This was very helpful. Thank you, truly calmed me.