Recession this recession that, is a recession coming or not? and if so, how do you prepare for it?
Okay, first things first, what is a recession?
The National Bureau of Economic Research says a recession happens when there is “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”
So basically during this period, the region's gross domestic product (GDP) drops, previously profitable industries become less valuable, inflation drives up prices for goods and services, and there’s a sudden spike in unemployment. As a result, consumer confidence also suffers, leaving people less willing to spend and put money into the economy.
Now that we’ve gotten that cleared, the real question is, are we in a recession?
Economists are saying close but not yet, here’s why. The Business Cycle Dating Committee looks at several economic indicators, and as of July 1, 2022, these indicators look "fairly good". Real personal income has increased by 0.3%, employment is up 1.6%, and industrial production has risen 3.4%.
But then there’s that one thing on everyone's mind....inflation. We’ve all felt the effects of higher gasoline, food, and housing prices, and as of June 2022, the inflation rate in the U.S. had risen to 9.1%, the highest inflation surge since 1981. But wait, there’s more. Real GDP declined in the first quarter of 2022 and is predicted to drop in Q2 as well, the stock market is taking a huge hit, and interest rates are continuing to rise.
If evidence indicates a recession is near, should we wait for the National Bureau of Economic Research to declare a recession? or should we play it safe and prepare before the storm?
How do you prepare for a recession?
1. Evaluate your personal economy
One of the worst parts of a recession is the uncertainty of not knowing what’s next and when the economy will get better. That's why it's extremely important to know your numbers and get clear on your current financial position to better prepare for the future.
Ask yourself these key questions as you evaluate your personal economy:
How much money is in all of my bank accounts?
How much cash can I get my hands on quickly, if I need it?
How much debt do I currently have (credit cards, student loans, etc.)?
What’s my monthly income and what are my monthly living expenses?
Do I have any major life events coming up with significant expenses attached (weddings, growing family, travel, or relocating)?
2. Increase Income
The best thing to do right now is to maximize your income. Because of inflation, the value of the dollar has decreased which means prices for consumer goods and services have increased. So your focus should be on increasing your income to offset this difference.
You can start by monetizing high-paying skills, updating your resume & portfolio, or leveraging the connections within your professional network. It's important to consider how harsh economic times can affect your career and to always have a backup plan.
3. Manage Spending
I don’t know who needs to hear this, but you are not El Chapo. Right now is not the time to be blowing money fast. Read the room.
I suggest locking in and managing your spending right now. Become aware of money going out of your bank accounts at all times. Identify your needs vs. your wants. Create a monthly budget based on your monthly income & expenses. Eliminate unnecessary bills to leave more room for saving & investing. This is what it means to be a financially responsible adult.
4. Keep Saving
If you’re already saving, great job, keep saving. Work on growing your emergency fund ahead of time to eliminate stress later down the road.
If you’re unaware, an emergency fund is a safety net for unforeseen circumstances, *cough cough* like a recession. You should have at least 6 - 12 months' worth of living expenses saved up in your emergency fund savings account, so when the recession does come, you could rest easy knowing you have an emergency fund in place.
5. Make Smart Investments
One thing about me, I’m here for spending money to make more money. That’s a part of the territory. But I advise everyone to calculate any and all risks before making investments.
This means assessing the possible outcomes to determine if the chances of success merit the risk. For example, if you're investing in a business, the stock market, property, etc. make sure to weigh the pros and cons before you make a final decision. Remember, the goal is to yield a return on investments, not take a loss.
I am fully aware that that was total information overload, but I hope this blog post helped you understand the state of the U.S. economy a little more and how you can better prepare for the recession.
If you have any more questions or need help creating a budget, savings plan, etc., feel free to schedule a consultation call with me and I’ll be happy to assist you on your financial journey!
For more resources, check out these links below: Book a Financial Advising Phone Call
Connect on Instagram: