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How To Manage Your Money During a Recession

By Jane Young, CFP, EA

With inflation at 8.6% and expected to increase, the federal reserve cannot rely on gradual increases in interest rates to bring prices down. The federal reserve is facing a difficult challenge to increase interest rates enough to get inflation under control without pushing the nation into a recession.

The consensus from a survey of 49 U.S. macroeconomic experts indicated a recession is likely to occur next year, the survey was conducted by the Financial Times and the Initiative on Global Markets through the University of Chicago. Furthermore, 68% of CEOs surveyed by the Conference Board, expect the federal reserve’s effort to decrease inflation will trigger a recession. On the bright side, they are anticipating a mild recession. The Conference Board, founded in 1916, is a non-profit research organization that distributes vital economic information to its peer-to-peer business members.

 A recession is a drop in Gross Domestic Product (GDP) for two consecutive quarters. A recession begins when the economy is contracting rather than growing. This will cause companies to lose money resulting in a drop in stock prices. 

The GDP dropped by 1.5% in the first quarter of 2022 and second quarter numbers will be released in late September. On July 1st, the Federal Reserve Bank of Atlanta lowered its Q2 GDP projection to -2.1%, officially forecasting a recession.

Recessions are a natural part of the economy occurring every five to ten years. According to the National Bureau of Economic Research, from 1945 – 2009, the average recession lasted 11 months. 

To prepare for a recession, focus on what you can control. Some dangers of a recession include a job loss or a decrease in pay. Increase your emergency fund to at least six months of expenses to cover an unexpected drop in income. Review your budget and decrease spending on discretionary items. Most of us have areas where we can easily tighten our belts such as dining out, vacation, entertainment, subscriptions, and clothing.

With the money you save by spending more conscientiously, pay down high interest debt. Do not use your liquidity to make extra payments on a low interest mortgage. Avoid taking on new fixed expenses, such as a new vehicle or buying a new home with a higher interest mortgage.

Recession proof your career by taking classes to improve job skills. Step up networking activities and nurture relationships that may help advance your career. Consider going back to school. The unemployment rate for those with an advanced degree has historically been lower than for those with a high school degree or less.

Maintain a long-term perspective and do not make investment changes based on emotion. Have faith that your financial plan will work for you into the future. The market has already dropped over 20% so this is not the time to make major changes - stay the course. Patience and discipline will minimize the risk of a permanent loss to your portfolio. This will not last forever and you want to be invested when the market rebounds.