Economists have been keeping a close eye on the state of the U.S. and the potential for significant decline across most sectors. After experiencing a boom, the American economy was struck hard by the COVID-19 pandemic. Now, as businesses emerge from shutdowns and struggles, there's a new fear that lingers over the supply chain: inflation and hiring stalls. This is raising concerns that another recession could be on the horizon. If you're fearful that another economic downturn is around the corner, here are some moves you can make to prepare yourself for a potentially tough time.
1. Assess your expenses.
The best thing anyone can do to brace themselves for a recession is to take a look at their monthly budget.
Obviously, any monthly bills like utilities, insurance, and the mortgage can't be sacrificed. Since the Great Depression, the United States has had many economic setback periods lasting anywhere from a few months to over a year. That has taught people about tightening purse strings when necessary.
Discretionary expenses are worth assessing to put on temporary holds or to do away with altogether. This could be anything from apps on our phones to going out to restaurants. The recent recession over a decade ago put things into perspective regarding household needs as well. If you have any major repairs on your car, home, or appliances that you've been holding off on, take care of them now to avoid a significant bill later.
2. Bulk up your savings.
Even in times of economic growth, it never hurts to set aside money for a rainy day.
Those backup saving funds can come in handy in the event of a downturn that results in job layoffs for you or your loved ones. With some banks now increasing deposit interest rates in response to adjustments by the Federal Reserve, now’s the time to see if your savings could be earning a better return.
Online high-yield savings accounts are affording more potential for growth for income that you set aside with each paycheck. Most financial analysts suggest having enough savings on hand to cover three to six months of living expenses. You may want to brace yourself for a greater safety net. If an unemployment rate is unchanged through a financial crisis, it could raise concerns for your financial well-being, so the more saved away, the better.
3. Get rid of high-interest debt.
While credit cards can help in times of need, they're basically useless if you've built up a lot of high-interest debt over time.
Pay down credit cards and high-interest loans while personal income is flowing, and economic conditions are still generally favorable for consecutive quarters of the fiscal year. This will not only eliminate some of the debt, but it will also give a boost to your credit score in the event that you'll need to take out an emergency loan during the recession.
Be sure to prioritize what bills need to be paid before a slowdown so you are not left with the shock of covering bills with a lack of real income coming into your household. If you find yourself falling behind, reach out to your creditors right away and ask for hardship concessions. There is greater leniency among most creditors after what COVID-19 did to the global economy. This might include making interest-only payments or putting payments into forbearance.
4. Keep track of economic activity.
When bracing for an economic recession, it's important to keep a close eye on key indicators in the financial markets that could let you know that a downturn is around the corner.
The U.S. unemployment rate is a great metric to track, monitoring job growth in sectors in relation to job loss in others. This is also a helpful tool in the event of a layoff, to help you hunt down a new job or even an additional source of income to get you through tough times.
Metrics like gross domestic product (GDP) and inflation rate are helpful to understanding expenses in relation to income, alerting to a downturn or even economic recovery. If you have invested in the stock market, be sure to keep a close eye on your portfolio. A bear market is not a reason to go into a selling frenzy, but it could be a good way to afford yourself some cash to help out at home by selling off shares based on analysts' research into the future of the stock.
If you notice that there is some fallout within the market, it's a good opportunity to "buy the dip" if you have the finances to do so. Fire sales on certain stocks could build your asset bubble after overcoming the economic slowdown. However, don't hedge your bets if the money supply is thin and it could impact your emergency savings.
5. Consider rolling over to a Roth IRA.
A stock market downturn is a prime opportunity for a Roth IRA conversion.
Investors make what’s known as nondeductible contributions to a pre-tax IRA before converting the funds to a Roth IRA, kickstarting tax-free growth. The trade-off is that Roth conversions trigger an upfront tax bill on contributions and earnings. The bigger your pre-tax balance, the more you’ll owe for the conversion.
You also run the risk of losing money within that account, much like you would in your stock market portfolio. While you're seeing periods of expansion across the U.S. economy and within your personal income, it could be a good time to ramp up how much you're setting aside with each paycheck for your retirement fund or Roth IRA. A growing number of economists will say moves like this are worthwhile to avoid greater losses down the line.
Next Steps
Now that you know how to brace for a potential recession, adjust your assets as you see fit. Don't hesitate to ask experts if this is your first time handling more than just your personal savings account. After all, you want to be sure that your portfolio can stand up to any economic climate that we've seen in recent decades.
About the Author:
Annie Dickerson and her partner Julie Lam are founders of Goodegg Investments — an award-winning real estate private equity firm — and creators of the Real Estate Accelerator Mentorship Program. They are authors of the book Investing For Good and hosts of the popular Life & Money Show podcast: https://goodegginvestments.com/
