We are publishing this article in 2023, the year many experts predicted we would see it The US economy enters a recession. As we wait to see if the National Bureau of Economic Research (NBER) will declare a recession, it’s worth considering how a recession will affect you and your finances.
What can you expect to happen to your lifestyle during a recession? Can you benefit from it? Is there anything you can do now to prepare?
Key takeaways
- As interest rates rise, financing large purchases becomes more expensive.
- Layoffs could increase if the economy continues to slow, making it harder to find steady employment.
- Strategies for surviving a recession include paying down debt, increasing savings, and budgeting to fit your financial situation.
Effect of high interest rates
Fear of recession Often with rate hikes from the Federal Reserve. The Fed uses rate hikes to slow the economy when inflation is high to keep growth sustainable. Although the Fed always hopes for a soft landing in which rate hikes don’t send the economy into recession, that’s a tall order to achieve.
Between March 2022 and March 2023, the Federal Reserve raised the target federal funds rate by 475 basis points (4.75%). The most immediate effect of a rate hike is that the cost of borrowing increases. Consumers can expect to pay more when shopping for a mortgage or car. You can also pay more on interest if you have a credit card balance (remember to pay off that balance every month if you can!).
The other side of the coin is that if you have savings you will get a boost from the rate hike. Because a higher fed funds rate means banks pay more to borrow from each other’s reserves, banks use higher savings rates to entice you to deposit your money so they can make loans. Many high-yield online savings accounts paying around 1% in early 2022 were 3% or more in early 2023.
If you need to borrow money when rates are highMake sure it’s for something you must have now and borrow as little as possible to minimize the interest you pay.
Big purchases
Although borrowing costs increase when rates are high, the silver lining is that you can more efficiently save money for your next home or car-related purchase. If you already have the financial bandwidth to make a large purchase, however, one advantage of doing so when rates are high is that demand for homes is generally lower, causing some sellers to lower their prices.
One way you can save is through negotiation. With fewer buyers in the housing market, a bidding war driving prices higher is less likely. Plus, your offer is more likely to be the only one, allowing you to buy the home for less than asking price.
If you buy a car, you can also save money. During the pandemic, new and used car prices skyrocketed. However, that trend is passing for used vehicles as prices are gradually falling. If you need a new vehicle, consider buying a used car to save money.
Slow job market
A slowing economy often brings layoffs and stagnates with it. There is a possibility that you may lose your job during a recession.
One way some people try to avoid the first round of layoffs is to make themselves indispensable to their team. They take work from their bosses, help colleagues with their workloads, and find project teams to join. The more valuable you can be, the less likely your company will let you go.
You can also update your resume. You probably haven’t done this since your last job. Take the time to update it with your current skills and accomplishments so you can start looking for a new job right away if you lose your current job.
Finally, consider finding a side hustle to earn extra income. A second job can help you pay off debt or increase your savings. If you lose your job and you still have a hustle, you’ll still have some income while you look for your next job.
Be resourceful
Recessions cause financial difficulties for many people. The lifestyle you are used to may not be possible in the future where money is tight. You can take steps now to better handle these changes when they happen.
If you lose your job or take a pay cut, cutting back on your living expenses will make your finances last longer. Take advantage of the dollar store to reduce the cost of purchases. Turn down your thermostat, dress in layers, or use a blanket to stay warm.
Finally, evaluate if you need something before you buy it. Ask yourself if you need to have something now or if it can wait. The more things you can do to reduce your living expenses, the easier it will be to get through the recession.
unknown variables
While no one knows how long the recession will last or how bad it will get, most experts agree that a potential recession in 2023 will be short-lived and mild. However, experts can only make their predictions based on our current information.
there is Unknown variables that can change things dramatically. Here’s what to watch out for.
supply chain
Supply chain disruptions can increase inflation due to limited supply. Supply chains were significantly disrupted during the pandemic, leading to shortages and price hikes. While most of the issues have been resolved, things are still not back to normal.
What’s more, while post-pandemic problems are being dealt with, other problems may arise. Take, for example, the threat of a railroad workers’ strike that we see in late 2022. If railroad workers had gone on strike, it would have caused significant supply chain disruption in the US.
Russia-Ukraine conflict
The most important unknown variable is the ongoing conflict between Russia and Ukraine. If the two countries reach an agreement to end the conflict, the global economy will benefit.
The stock market will also rise on this news and oil prices will fall.
But if the conflict escalates and other nations join in, it could have dire consequences. There could be supply chain issues, high gas prices and more.
What can I do now?
Now that you know how a recession can affect you and the factors that can make it mild or severe, what smart things should you do with your money now and during a recession? Here are a few ideas.
Invest wisely
There is a recession A good time to buy certain stocks At a discount. Even though the stock market usually falls during a recession, that doesn’t mean you shouldn’t be actively investing. There are two strategies you can use to invest during a falling market.
First, you can invest in individual stocks. Do your research to determine when stocks are selling at a discount.
If you go this route, only invest a certain percentage of the money you plan to invest at any given time. No one knows where the bottom is, so you can reduce risk by putting 25% of your available investment money into the market at a time.
Another option is to use a dollar-cost-averaging strategy. With this strategy, you take a fixed amount and invest it regularly in smaller amounts. This minimizes the impact of temporary market movements on your investment.
Whatever strategy you use, keep your emotions in check. Over an extended period, the economy usually grows, so pulling your money out of the market because of a temporary drop in prices may not benefit you in the long run.
Increase savings
There is another money arrangement to make Increase your savings. Higher interest rates can make saving more efficient. With the Fed aggressively raising rates, many high-yield savings accounts now pay more than 3% interest.
You can also consider short-term Treasuries and I bonds, which typically have higher returns than savings accounts.
Regarding savings, look for products that will give you a competitive interest rate.
Reduce debt
If you have high-interest debt, you should work harder to pay off your balance. There are two reasons for this.
First, your interest rate on variable debt (such as adjustable-rate mortgages and credit cards) will continue to rise as the Fed raises rates. This will make your debt more expensive.
Second, with a recession comes the risk of job loss. While unemployment is stressful, having a mountain of bills to pay all at once is even more stressful.
By paying off some of your debt, you free up money that you can use to pay for everyday living expenses. Even if you think your job is secure, it is wise to pay off debt because debt can hold you back financially.
The bottom line
A recession will affect everyone differently. Some people will lose their jobs, while others will find themselves at the cost of buying a home. The important thing to do is take some time, look at your financial situation and make a plan. Do you have a significant amount of debt that you must pay off? Are you at risk of losing your job? Do you have savings you can live off of? How will higher interest rates affect your next big purchase?
The more time you take to understand how a recession will affect you, the better you can plan and minimize its impact on your financial health.
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