What is a recession?
A recession is a sustained economic downturn that is significant and widespread. One rule of thumb to identify a recession is when there are two consecutive quarters of decline in the U.S. gross domestic product. The U.S. has faced six recessions since 1980. The last recession in the U.S. occurred at the beginning of the COVID-19 pandemic in early 2020.
A recession is typically marked by reduced consumer demand, higher unemployment, and decreases in manufacturing and production of goods. A recession could last a few months or a number of years. Even when a recession lasts for a short period of time, it may take years for the economy to fully recover. Unemployment may also remain high even after the economy has started to rebound.
Why is it important to prepare for a recession?
Recessions can come with little or no warning. During the Great Recession of 2008, many people depleted their savings after losing their jobs. Failure to prepare can deprive you of even your most prized assets.
A recession may lead to an increase in credit card debt, reliance on high interest loans, and other risky financial actions. It can take many years to recover once you incur high-interest loans and other debt. Preparing financially for a recession can help you maintain your lifestyle, and manage your most important debts, if your source of income is impacted.
How much is recommended to save to protect myself from a potential recession?
At a minimum, a $1,000 fund to take care of unexpected expenses, such as emergency car or home repairs, is a good place to start. After making a short-term emergency fund, financial advisors recommend planning for the long term by setting aside enough money to cover three to six months of typical living expenses. Three to six months of savings can allow you to avoid credit card debt and give you time to find new employment. If your savings accumulates beyond this point, you may want to research longer term investments and discuss your options with a financial advisor.
When you set up a new savings account for your emergency fund or longer term savings, you may want to select one that permits withdrawals without penalty. Many investment and savings accounts restrict the number of withdrawals that you can make each month, which can be helpful to limit any temptation to dip into that account for other reasons. If you have to spend emergency savings, replenish the funds as soon as you can.
What can I cut back on during a recession?
Try to limit spending in anticipation of or during a recession. Cutting back on discretionary spending, such as vacations, restaurants, and entertainment can add up over time. Sticking to a budget or financial plan, however, is an effective way to monitor expenses during a recession. Since budgeting is generally unique to each person, when you make and stick to your budget, identifying spending habits that you can cut back may be easier.
For homeowners, a recession may be a good time to refinance your mortgage. Typically, during a recession, mortgage interest rates fall. Refinancing to a lower interest rate can lower your monthly mortgage payments significantly.
How can I handle my debt in light of a potential recession?
Debts, like credit cards, limit your flexibility during a recession. Consolidating loans can make your debts more manageable. You may also obtain a better interest rate on your debt during consolidation. A Personal Financial Statement for individuals or married couples can help you start organizing your debts.
If you are unable to make your monthly payment, creditors may be willing to accept an amount that you can afford. You can send your creditor a Hardship Letter to explain why you cannot afford the regular payment and propose a new, lower payment. For some, bankruptcy may be a viable option. A lawyer can assist you to determine whether bankruptcy is the right choice for you.
Scammers and hackers can be more active during a recession, so it is even more important to keep a close eye on credit card and bank account statements. You may Dispute Fraudulent Credit Card Transactions as soon as you learn of fraud. If you have a payment due, send your credit card company a letter notifying them that you will not be paying the fraudulent charges. If you need assistance disputing fraudulent credit card transactions, you may want to reach out to a lawyer for help.
How can I manage long-term investments during a recession?
Long-term investments may lose value during a recession. The U.S. economy, however, tends to rebound so losses on long-term investments could be temporary. Most advisors recommend that you invest money you do not intend to spend soon.
Recessions may force some into making hasty decisions about long-term investments. Your long-term investments will likely increase and decrease in value many times over the course of your lifetime. Many financial advisors agree that you are better off keeping your investments in the market for a longer period of time.
Working with an experienced financial advisor can help keep your retirement accounts positioned to weather an economic recession.
How can I maintain job security during economic uncertainty?
If your work might be impacted by a recession, a new job in a different industry could offer more job security. Nursing, law enforcement, child care, legal services, and education are all professions less likely to be affected by a recession. Construction, retail, and real estate, however, are vulnerable.
If you enjoy your current employment, consider supplementing your income with a side gig or second job. It is also a good idea to keep your resume up to date so you are prepared to find new employment in the event you lose your job with little or no notice.
If you have more questions about protecting your finances and retirement accounts during a recession, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.