‘We believe a hard landing will ultimately be inevitable’: How to prepare your finances for a recession
Two years after the short and sharp recession linked to the pandemic, Wall Street is once again warning of a new recession on the horizon.
It’s not a lot, but financial planning experts say it should be enough to inspire people to make their own contingency plans. This is especially the case, given the personal finance fears that occurred earlier in the pandemic.
The COVID-19-induced recession officially started in February 2020 and ended in April 2020, but policymakers and ordinary people are still grappling with the aftermath.
The Federal Reserve is trying to control inflation, which is now at its highest level in four decades. The concern is that hikes in key interest rates from close to 0% and tighter monetary policies could squeeze consumer demand to the point that the economy could potentially – focus on potentially – takes a hard landing in another recession.
There is a 15% chance that a recession will occur in the next 12 months, Goldman Sachs GS,
forecasters said this week. The odds jump to 35% within the next 24 months, they wrote.
At Deutsche Bank DB,
The researchers said, “We believe a hard landing will eventually be inevitable by late 23/early 24 after an aggressive series of Fed hikes over the next 18 months.” And that’s even with the good financial situation that many consumers currently find themselves in, the note adds.
If there’s been a lesson in finance and investing over the past two years, it’s that market reversal events “can always be around the corner,” Joel Cundick of Savant Wealth Management told McLean, Virginia. issues – global and domestic – that could trigger a recession, the real market drivers may be the surprises no one is aware of today.
Here’s a data point on how quickly things can go wrong: People earning up to $40,000 a year suddenly had a 40% chance of losing their jobs in April and May 2020, the president said of the Fed, Jerome Powell. observed in July 2020 during the peak of the first wave of the COVID-19 pandemic.
In 2020, 15% of all American adults had at least one spell of unemployment, according to the Pew Research Center said Wednesday. Median incomes of low-income households fell 3% from 2019 to 2020, adjusting for inflation, the Pew researchers said. Middle-income earners, earning between $52,000 and $156,000, saw their median income decline by 2.1%, they noted. People earning more than that saw their median income drop by 0.5%, essentially unchanged, the researchers noted.
For many people, however, it was a quick financial jolt.
Perhaps softening the blow this time around, Fannie Mae said the US economy was facing a “modest recessionin 2023, in part due to the Fed’s monetary policy tightening, Russia’s war in Ukraine and rising interest rates.
As Americans’ wallets recover, MarketWatch spoke to financial experts to get their perspective on what families can do now to prepare for a recession:
Pay down debt and build a cash cushion
In a market downturn, you won’t necessarily want to cash in stocks or other investments to fund life’s many expenses. And the increased risk of job loss means that many families will face the reality of having to stick together to survive.
MarketWatch heard from 10 different financial experts, and one universal piece of advice was to settle your finances in advance. Reducing debt, especially high interest debt such as money owed on a credit card, will reduce the number of monthly payments you are responsible for and free up money in the future.
Even without a recession, it’s a good idea to think about high-interest debt. For example, experts note that credit card APRs are poised to rise with more Fed rate hikes on the horizon. This will make it even more expensive to carry over a balance from month to month.
Likewise, it’s always important to maintain an emergency fund for a rainy day, but such a mundane task can be easily postponed. Under normal circumstances, experts recommend having enough savings to cover three months of expenses. But a recession is different.
“During a recession, it can be more difficult to find a job when unemployed, so increasing emergency savings to 6 to 12 months of savings can provide additional security,” said Summer Red, head of education at the Association for Financial Counseling and Planning Education.
Rethink major upcoming purchases
Getting control of your spending is always a wise financial decision. But it’s especially important to take a closer look at large purchases, especially when the market is volatile.
“Avoid buying with your eyes and avoid buying because everyone says you should do it now,” said Kate Mielitz, head of special groups at the Association for Financial Counseling and Planning Education. “The housing market, auto sales – these are great examples of big ticket items that make us feel good initially, but have very high prices that we carry with us for many years.”
Take the emotion out of investing
In many ways, a recession is a test of will. For many, it is natural to react to a market downturn by changing one’s investment strategy, either out of fear of losing money or a desire to take advantage of what appears to be an opportunity.
About two-thirds of investors (61%) expect even greater market volatility over the next 12 months, according to a national survey of people with investable assets worth at least $100,000. Seven in ten said they were concerned about a recession during that 12-month period.
But giving in to this emotional approach is risky, especially when it comes to retirement savings. Adopting a “disciplined and systematic strategy” for investing will take emotions out of the equation, said Lisa AK Kirchenbauer, founder and president of Omega Wealth Management, a financial planning firm based in Arlington, Virginia.
If you’re saving for a major purchase you plan to make in the next few years, consider proactively moving those funds into safe-haven assets or a savings account, even if it means giving up a bigger return in the meantime. .
For retirement savings, the choices you make should depend on your current situation and when you plan to retire. “Retirement expenses don’t all come at once, but over 20 or even 30 years, so it’s important to be careful to maintain some degree of long-term goal allocation even in the first year of retirement” , said Cundick.
Automate your finances
For people who don’t trust themselves to manage their money without getting overwhelmed by their emotions, automating your finances can be helpful. This includes everything from setting up automatic bill payments to creating direct deposits into savings or investment accounts.
The best advice, according to many financial experts, is to ignore the markets as much as possible when it comes to long-term savings. Automating your finances will make your job easier.
Focus on your career
The short recession that occurred at the start of the COVID-19 pandemic was accompanied by a massive increase in unemployment across the country. In April 2020, the unemployment rate soared to 14.8% – the highest level recorded since this data began to be transferred in 1948.
With the COVID-related recession, the labor market rebounded quickly. In March 2022, the unemployment rate stood at 3.6% and employers are still hungry for workers. The 3.6% rate is just below the pre-pandemic rate of 3.5%, a 50-year low. It is surely a nice rebound, but it is not always acquired. The Great Recession that began around 2008 was defined by high levels of long-term unemployment.
Rising unemployment and recessions go hand in hand. When the economy is in a recession, businesses have to make cuts to stay afloat. In the case of the COVID recession, young adults have been hardest hit by pandemic-related job losses, according to a report by the Economic Policy Institute.
For people who are currently employed, taking the time to prepare for the possibility of being laid off is a smart decision to make now.
“Enriching your certifications, skills and experience to make yourself as valuable to current or potential employers are all prudent steps to take now to protect yourself against a possible recession,” said Greg McBride, chief financial analyst at Bankrate. com.