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How to prepare your personal finances for another recession




2 years after a brief and sharp pandemic-related recession, Wall Street is again warning of a new economic downturn looming.


Financial planners suggest thinking about developing your own financial contingency plans. It is important to consider the experiences and fears of the pandemic that have affected personal finances. The COVID-19 recession formally began in February 2020 and ended in April 2020. But politicians and ordinary people continue to struggle with the consequences of the pandemic.


The US Federal Reserve System (FRS) is trying to tame the highest inflation in the last 40 years. An increase in the key interest rate and a tightening of monetary policy could lead to a decrease in consumer demand to such an extent that the economy potentially faces another recession.


Opinion of Fed Chairman Jerome Powell, April 21, 2022:

"...it makes sense to move a little faster when it comes to the speed and extent of the key base rate increase."


In mid-April, forecasters at Goldman Sachs said:

  • the chance of a recession in the next 12 months is 15% ,

  • in the next 24 months, the chances increase to 35% .


Deutsche Bank wrote in a research note:

"...we believe a hard landing will eventually be inevitable by late 2023/early 2024 following an aggressive series of Fed rate hikes over the next 18 months. And that's even with the good financial shape many consumers are in right now ."


Joel Cundick of Savant Wealth Management said:

"...events that lead to a sharp drop in the market "can always be right around the corner." While there are currently many known problems - global and domestic - that can cause a recession, the real driving forces of the market are surprises that no one is talking about today does not know".


Recommendations from financial experts to prepare for a recession:


Pay off debts and create a cash cushion


In a market downturn, you don't want to cash in on stocks or other investments that are required to fund your many living expenses. And the increased risk of job loss will force many families to join forces to survive.


The universal advice of 10 financial experts: to manage personal finances in advance.


Reducing debt, especially high-interest debt (credit card debt), will reduce your monthly payments and free up cash for the future. Even in the absence of a recession, it is worth thinking about high-interest debt. Rising inflation could lead to higher interest rates on credit cards. Rolling over debt from month to month will be even more expensive.


It is always important to have a safety fund for a rainy day. However, there is a temptation to postpone such a boring task. Under normal circumstances, experts recommend having enough savings to cover 3 months of expenses. But a recession is a completely different matter.


"During a recession, it can be harder to find a job. Increasing emergency savings to 6-12 months can provide additional security," says Summer Red, manager of the Association for Financial Counseling and Planning Education (AFCPE).



Review upcoming major purchases


Cost control is always a wise financial move. When the market is volatile, it is especially important to pay attention to large purchases,


"Avoid buying with your eyes. Don't buy when everyone says you should do it now," says Kate Mielitz, AFCPE manager. "The housing market, car sales are great examples of large purchases that feel good at first. But then we carry around 'very big price tags' for years."



Get rid of emotions when investing


In many ways, a recession is a test of willpower . For many, the natural reaction to a market downturn is to change their investment strategy. Either out of fear of losing money, or out of a desire to take advantage of what appears to be an opportunity.


According to a Nationwide survey, 61% of investors expect even more market volatility in the next 12 months. 69% fear a recession during this period.


But succumbing to an emotional approach is risky, especially when it comes to retirement savings. According to Lisa AK Kirchenbaue, founder and president of Omega Wealth Management, "A disciplined, systematic investment strategy will take emotion out of the equation."


If you are saving money for a major purchase and plan to make it in the next few years, transfer funds to safe assets or a savings account in advance. Even if it means giving up higher returns.


The choice of investment instruments for pension savings should depend on:

  • from the stage of life you are in,

  • how soon you plan to retire.


"Retirement expenses don't come all at once, but over 20 or even 30 years. It's important to be careful to maintain some degree of long-term distribution of financial goals, even in the first year of retirement," says Joel Cundick.


We previously wrote about the five-point "game plan during the sale" by Michael Brush of MarketWatch.


Automate personal finance


If you can’t manage money without emotions, then perhaps finance automation will be useful for you:

  • setting up automatic bill payment,

  • creating direct deductions to savings or investment accounts...


According to many financial experts: The best advice for long-term savings is to ignore the financial markets . Automation of finance will facilitate this task.


Focus on your career


The onset of the COVID-19 pandemic was accompanied by a massive increase in unemployment in all countries. In April 2020, the U.S. unemployment rate rose to 14.8%, the highest since the data was tracked in 1948.


After the COVID-related recession, the labor market quickly recovered. As of March 2022, the US unemployment rate was 3.6%. Employers are still in need of labor force. It's a good jump, but it's not always the case. The Great Recession of 2008 was driven by high long-term unemployment.


Rising unemployment and recessions go hand in hand. When the economy is in a downturn, companies are forced to cut back. Young workers have been hardest hit by job losses during the pandemic, according to a report by the Economic Policy Institute.


For those who currently work, it makes sense to set aside time to prepare for a possible layoff.


"Upgrading your skills and experience to make yourself more valuable to current or potential employers are all smart steps you can take now to protect against a potential recession," said Greg McBride, chief financial analyst at Bankrate.com.


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