How To Prepare for Recession
With fears of recession looming, everyone has the same thing on their mind: "how can I get through it?" If you're worried about what a recession may hold for you, then you're in luck because we're here to help. Here we discuss some of the basics that you need to know to get through whatever the future of the economy looks like.
Cash Over Debt
If you've been paying attention to the bond market or trying to get a loan, you've probably noticed that the cost of debt is high right now. Lately, the Fed (aka Federal Reserve System) has been rapidly raising interest rates and is expected to continue to raise rates in order to help combat inflation. But how does this affect the cost of debt and what does it mean for you? As the Fed raises interest rates, the cost of borrowing becomes more expensive. This is especially rough news for home buyers, who are faced with rising mortgage rates on top of home prices that are already sitting at all-time highs. In times like these, it is best to avoid taking on debt as much as possible. That refers to more long-term debt, like an auto loan or mortgage, and other forms of shorter-term debt, such as credit card debt.
While the current market conditions don't look great for debt or equity, there is still an asset that you should focus on growing. That asset is cash. Building up cash is one of the best investments you can make during a recession. I'm sure that you've heard how recessions offer the opportunity to buy stocks at great prices. While true, you also need the capital to buy those stocks when they are cheap. That's why you should focus on building your cash reserves as much as possible. It's also good to have cash on hand in case of potential job loss or so you can avoid taking on costly debt in the case of a major unplanned expense.
The possibility of recession doesn't mean you need to stop spending entirely or start digging into the emergency rations you've been keeping in the garage in case of a zombie apocalypse. It just means that now is the time to review your spending and focus on optimizing it. The first way to optimize your spending is to eliminate any unused or unknown expenses. You can do this by going through your credit card statements and looking for any subscriptions or fees for services you don't use or recognize. You'll likely find a subscription you forgot to cancel or a free trial that turned costly after the trial period ended. There are also applications and websites, such as Truebill, that help you identify and cancel all your unwanted subscriptions.
A key aspect of spending thoughtfully is reducing many of the expenses that aren't necessary, but that doesn't mean you should cut your spending to the point where all you have is food and a roof over your head. You want to cut expenses, while still being able to enjoy the things that make you happy. The best way to do that is by maximizing your joy per dollar. By taking a few hours to examine what brings you the most joy per dollar, you can restructure your spending in a way where you can still enjoy life while spending less. Even in times of economic growth and stability, maximizing your joy per dollar can be a great tool for achieving financial stability and maximizing your happiness.
It is also important to pay attention to your spending on "big-ticket items." These are the things that may be taking up a substantial portion of your budget, such as housing or vehicles. Now, this doesn't mean you should immediately sell your house and car, but it does mean you should make sure that your house and car (or other big-ticket items) are within your means. Times of economic downturn can bring the opportunity to reevaluate what fits within your budget and lifestyle.
Labor Market Worries
The labor market is already starting to experience a string of layoffs and there will likely be more to come, but that doesn't mean we will experience mass layoffs and unemployment near 10% like during the start of the Covid-19 pandemic or following the 2008 financial crisis. Though some layoffs will be inevitable, each industry and person will be affected differently.
The first thing to note is that different industries will likely see variations in the number of mass layoffs. The vast majority of layoffs so far have been in the technology sector, as many growth companies found themselves overexpanding in the wake of the pandemic. This shouldn't be a surprise to anyone who pays attention to the stock market, as the technology sector is currently leading the market in losses by a fairly wide margin. There is also the circumstance of an individual's value. At the end of the day, if you prove yourself to be invaluable to your company then you will be able to avoid mass layoffs in most cases (unless in the case of total bankruptcy). That means the best thing you can do is to make yourself valuable. So valuable that the company can't afford to lose you no matter how turbulent things get.
What Will Happen Next
In short, nobody knows. The market and the economy are both unpredictable. Even CEOs at some of the top banks around the world disagree on the timing and strength of a future recession. Even with all the resources in the world, there are still many variables that require some form of assumption. Though there is a possibility of a "soft landing," where we see a slowdown in economic growth without a recession, Federal Reserve Chairman Jerome Powell has stated that "a soft landing will be very challenging." In a situation where the future of the economy is relatively uncertain, the best thing to do is be prepared. By taking a few small steps, like reducing your exposure to debt, building up cash, and reducing unnecessary expenditures, you can feel secure no matter what the future has in store.