Nov 11, 2024
Understanding what recession means and how it might affect you may be the best way to prepare. That way, you’ll know how to position your personal finances so you can weather an economic downturn.
Taking steps now to protect your budget and job prospects may also help you feel more in control if or when the next recession comes. And it could help you be better positioned financially no matter what the future holds.
You might, for example, check your budget more often, add to your emergency fund, and pay off or consolidate your higher-interest debt with a lower-interest loan. If an economic downturn could put your job at risk, you may want to step up your networking efforts and build your skills. If the impact is severe, it might be a good idea to consult a financial planner.
But first, learn what a recession is and what you might do on your own to prepare.
A recession occurs when there is a “significant decline in economic activity that is spread across the economy and lasts more than a few months,” according to the National Bureau of Economic Research (NBER), the nonpartisan group that sets the official designation.
Technically, an economic recession may not always be easy to pinpoint. Some economists think of a recession as reduced economic growth in the country that last for at least two consecutive quarters, or six months.1 In its definition, the NBER explains the duration of any recession as “the period between a peak of economic activity and its subsequent trough, or lowest point.”
For most consumers, the official definition is less important than how a recession affects them personally.
When businesses cut back production because of lower demand for their products, layoffs might follow.2 And when layoffs lead to cuts in household income, consumers often look to reduce their spending. As a result, demand for products and economic activity may go down even more.
To help increase or stabilize economic activity, the Federal Reserve may lower interest rates. By making it less expensive to borrow money, lower rates can lead to more purchasing and greater economic activity. Lower rates are also partially intended to help ensure enough economic growth to keep unemployment levels low.
Historically, the economy moves in a cycle over the long term—from expansion to contraction, back to expansion, and so on.
Not long ago, high inflation led the Fed to hike interest rates in an effort to slow the economy and bring prices down. Higher interest rates increase the cost of borrowing, which may reduce the demand for things like homes or cars, which many people can’t buy with cash.
Later, as economic growth slowed, the Fed began to lower interest rates.
As history has shown, these periods of economic growth and recession, with its impact on inflation and interest rates, is ongoing. To prepare for the economic cycle (or just to fast-track your financial goals), here are three strategies that may be helpful in case of a recession:
Of course, any time is a good time to take a close look at your finances. If you’re concerned about a possible slowdown, doing it sooner may help you feel better.
Many people find that talking to a financial professional can help relieve some of their stress. Recession or not, a certified financial planner can help you set goals and track your progress. For example, if you don’t know how you will cope if you lose your job, they might be able to help you come up with a plan.
If you already work with a financial planner, you could set up a call to explore “what ifs?” One question might be: How much cash would you need if a recession came? Many experts suggest having three to six months of living expenses in available savings. This depends on your cost of living and income.
Playing out a few “what if” scenarios may show you how long you can get by on your emergency fund. It also could help you get ready to act fast and adjust spending if you need to.
Even if you check your financial picture regularly, it’s still a good idea to plan what you might do if your income takes a hit.
Your budget won’t work if you expect to “set it and forget it.” When you’re concerned about a recession, you should take another look at your budget and think about ways to cut your spending.
You might even be able to cut back on living expenses. For example, if you’re part of a two-income household, see if you could get by on only one of those incomes. If you can, you might look for ways now to add to your emergency fund. Or maybe hold off on big purchases so you will have cash in the bank if your situation changes.
When interest rates fall, it could make sense to take advantage of a lower annual percentage rate (APR) to pay down higher-interest debt. One way to do that is by consolidating it into a loan with a lower fixed rate.
Just be sure to look for a lender that doesn’t charge prepayment penalties. At Discover® Personal Loans there are no fees at all as long as you pay on time. This could help you save on interest in two ways: by potentially paying a lower rate overall and by paying the loan off early without any penalty if things improve.
If you work in a job or industry that could be hurt by a recession, keep your ears to the ground about cutbacks. Start networking so you can stay in the know about changes in the marketplace, and get ready to make a switch if necessary.
You could also look for a second job or side hustle. The extra income might help bridge the gap if you are laid off from your job.
It’s normal to worry about a recession. But it may help to remember that recessions are a part of every economic cycle. And they aren’t always severe or long-lasting.
Whatever happens, you could take steps now to trim spending, add to your emergency fund, and pay down debt. You can always ask a financial professional if you’d like more specific advice. If a slowdown does come, you may find relief knowing you’ve taken steps to lessen the impact.
As you look at your options, you may find that a debt consolidation loan could help improve your financial picture, now and in the future.
Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.
The information provided herein is for informational purposes only and is not intended to be construed as professional advice. Nothing contained in this article shall give rise to, or be construed to give rise to, any obligation or liability whatsoever on the part of Discover Bank or its affiliates.
