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A recession isn't a certainty, but the latest increases in the inflation rate may be a sign of difficult economic times to come. In particular, experts have pointed to record-high gas prices and the Russia-Ukraine war as potential leading indicators of economic struggles.
If you're worried about how a recession may impact your finances, now may be the time to take stock of your situation and look for more opportunities to save more and pay down debt. It's also a good idea to review your budget and look for areas where you can improve your spending habits. Here are five steps to take right now if you're worried about potential economic changes on the horizon.
1. Don't Panic Just Yet
While experts may warn that a recession is coming, it's not a foregone conclusion. And even if an economic downturn does occur, it almost certainly won't be on the same scale as the Great Recession of the late 2000s or the economic turmoil caused by the onset of the pandemic.
There's still a lot of uncertainty about what challenges a recession could bring about, and consulting historical trends doesn't help much to clear things up. For example, while recessions are virtually always linked with increased unemployment, the National Bureau of Economic Research's Business Cycle Dating Committee shows that the peak unemployment rate has been different for each recession. Also, the length of each recession, going all the way back to the 1850s, has varied greatly.
Despite these uncertainties, focusing on what you can control can help you shore up your finances in the best possible way regardless of what happens.
2. Take Stock of Your Finances
Take a look at your full financial picture and look for areas where a recession could impact your situation. Here are a few ideas:
- Investment portfolios: If you're nearing retirement or you have other short-term investment goals, take a look at your investment portfolios to see how much risk you're taking with your positions. But if you don't plan on needing your retirement or other investment funds for a long time, you may not need to worry.
- Savings: Financial experts typically recommend keeping three to six months' worth of basic expenses in your emergency fund, which could help you if you lose your job during an economic downturn. It's generally best to keep your emergency fund in a savings account where it won't be impacted by investment volatility. If you've been keeping your emergency fund in a brokerage account, consider moving it to a more liquid account, such as a high-yield savings account.
- Debt: The more debt you have, the harder it'll be to keep up with your obligations if a recession affects your income. And if you have debt with variable interest rates, such as credit cards, a home equity line of credit or an adjustable-rate mortgage, expect those rates to go up as the Federal Reserve continues to hike its interest rate to combat inflation.
- Income: Think about your current job and how it might be impacted by a recession. Some industries, including retail, restaurants, bars, leisure, hospitality, real estate and automotive, tend to be hit harder than others when the economy is struggling.
Because every situation is different and each recession is unique, it's important to do your due diligence to understand how you may be impacted.
3. Reassess Your Budget
Adjusting your spending habits can be difficult, especially if you're used to a certain lifestyle. But your future self will thank you for taking the time now to prepare for potential problems to come.
If you don't already have a budget, take a look at your average income from the past few months and compare it with your average expenses. Then, break down your expenses into different categories, such as rent or mortgage payments, utilities, dining out, travel and entertainment.
This process will tell you where your money is going so you can evaluate where you can make changes. You'll also have the information you need to determine whether you can put more cash toward savings or debt every month and where you'd need to cut back to make that happen.
The important thing is that as your financial future becomes murkier and potentially more restrictive, you'll be equipped with the knowledge you need to make sound decisions.
4. Pay Down Debt
If you have high-interest debt, such as credit card balances, make it a priority to pay it off as quickly as possible. If interest rates continue to rise, the debt will get more and more expensive, which can put even more pressure on your financial situation.
Some potential strategies for paying off multiple debts include:
- Debt snowball method: Pay the minimum amount on each account and add any extra money you can spare to the account with the lowest balance. Once that account is paid off, take the minimum and extra payment and add it to the minimum payment on your next-lowest balance. You'll keep doing this until all of your debt is paid off.
- Debt avalanche method: This option is similar to the debt snowball method, but instead of targeting the lowest balance first, the avalanche method focuses on the accounts with the highest interest rates.
- Balance transfer card: Balance transfer credit cards offer introductory 0% APR promotions so you can pay down your debt interest-free for up to 21 months, depending on the card. These cards typically charge an upfront fee between 3% and 5%, though, so consider using a balance transfer calculator to make sure the math works in your favor. Also, note that balance transfer cards typically require good credit to qualify.
- Personal loan: If you prefer a structured repayment plan, consider a personal loan to consolidate your debt. With good credit, you may be able to secure a single-digit interest rate—but watch out for lenders that charge origination fees, which can cost up to 8% of your loan amount in some cases.
As you consider your debt payoff plan, think about splitting your efforts between paying down debt and bolstering your savings to ensure you have some cash reserves if you need them during a downturn.
5. Review Your Credit History
Hopefully, you won't need to borrow money to cover necessary expenses during a recession. But if that's the case, you'll want to apply with peace of mind knowing that your interest rates will be relatively low.
Experian's free credit monitoring service provides you with access to your FICO® Score☉ and Experian credit report, as well as real-time alerts when changes are made to your report. Having this information can help you pinpoint areas you can address to improve your credit score and also track your progress.
It'll also help you spot potential fraud and errors so they don't wreak havoc on your life in an already difficult situation.