Money tips for navigating a recession. What you should know about layoffs, debt and investments

This story is part of So Money (subscribe here)an online community dedicated to financial empowerment and advice, led by CNET Editor at Large and So Money podcast host Farnoosh Torabi.

What’s happening

A growing number of financial experts say the US is headed for a recession, defined as two consecutive quarters of significant, pervasive declines in economic activity.

Why it matters

Recessions have historically been characterized by widespread layoffs, bankruptcies, higher borrowing costs and turbulent stock markets.

What’s next

Gather facts to protect your financial situation. Nobody can predict the future and it is important to proceed calmly and deliberately.

As Inflation continues to rise and the Federal Reserve gearing up for another rate hike, economists and financial experts fear a recession may be inevitable. Technically, the country is in recession when gross domestic product, the value of all goods and services produced in a given period, falls for two straight quarters. In the first three months of 2022, US GDP fell by 1.4%. While the National Bureau of Economic Research is officially on the phone about a recession, we will know whether the US meets the criteria for a recession on Thursday when the Bureau of Economic Analysis (BEA) releases its second-quarter flash estimate.

In an aggressive bid to tame inflation by slowing the economy, there are also concerns that the Fed could force the country into a painful recession. In the past, the Federal Reserve has raised the federal funds rate to lower inflated consumer prices, making borrowing more expensive. But the three rate hikes this year, including last month’s, have been the largest in nearly three decades, have not made a dent in inflation. It is 9.1%, more than four times higher than “normal”.

Federal Reserve Chair Jerome Powell acknowledged the risk of a recession during a European Central Bank forum on Wednesday. But he also noted: “I would disagree that this is the biggest risk to the economy. The bigger mistake one could make would be not to restore price stability.”

As we brace for the storm as recession fears mount, more and more of us are thinking about finance and employment. The My So Money podcast audience sent in a series of questions about recessions, how best to prepare, save up, invest and make wise money moves during these uncertain times. Here’s a little guide to help you get through this tough financial time.

First, what might we see in a recession?

It’s always helpful to go back and review the results of the recession so we can manage our expectations. While every recession varies in length, severity, and impact, during economic downturns we tend to see more layoffs and a rise in unemployment. Access to the credit market could also become more difficult and banks could be slower to lend because of concerns about default rates.

Continue reading: The economy is scary. Here is what the story tells us

Just as the Federal Reserve continues to do increase prices To try to curb inflation, we will see the cost of borrowing—for example, mortgages, car loans, and business loans—rise even more sharply. So even if you qualify for a loan or credit card, The interest rate will be higher than last year, making it harder for households to borrow or pay off debt. We are already seeing this in the housing market, where the average rate has dropped to a 30 year fixed mortgage recently approached nearly 6%, its highest level since 2009.

During a recession, when interest rates rise and inflation cools, the prices of goods and services and ours fall Personal savings rates could increase, but it all depends on the labor market and wages. We may also see an upsurge in entrepreneurship, as we saw in 2009 during the Great Recession, as the new unemployed often look for opportunities to turn a small business idea into a reality.

Should I expect layoffs?

With an unemployment rate of 3.6%, the labor market seems to be the only stable part of the economy, at least for the moment. This is likely to be temporary, however, as companies grappling with current financial headwinds — including inflation, rising interest rates and flagging consumer demand — have already begun announcing layoffs. According to, a website that tracks job losses among tech startups, there were nearly 37,000 startup layoffs in the second quarter of 2022. Shopify announced this week reduction of its workforce by about 10% or around 1,000 layoffs. CEO Tobi Lütke said the e-commerce company’s pandemic-driven growth plans “didn’t pay off.”

During the Great Recession, unemployment peaked at 10% and it took an average of eight to nine months for the unemployed to find a new job. So now might be the time to review your emergency fund if you think you’re running a deficit. If you’re unable to cover expenses for at least six to nine months, which is difficult for most people, try to accelerate savings by cutting expenses or generate additional money. It’s also a good time to update your resume and connect with influential people in your professional and personal network. if You are firedmake sure you apply for unemployment benefits right away and get your health insurance covered.

If you’re self-employed and worried about a potential downturn in your industry or losing customers, explore new revenue streams. Also, try to increase your cash reserves. Again, if previous recessions have taught us anything, it’s that cash opens the door to choice and greater control in a challenging time.

Should I expect interest rates on my debt or loan to increase?

As Federal Reserve raise interest rates further To try to curb inflation, variable interest rates are set to rise — pushing up credit card APRs loan, and make monthly payments more expensive. Ask your lenders and card issuers about it low-interest loan options. Check if you can refinance or consolidate debt one-time fixed rate loan.

In past recessions, some financial institutions have been reluctant to lend as often as in “normal” times. This can be worrying if your business relies on credit to expand or if you need a mortgage buy a house. It’s time to pay close attention to yours credit-worthiness, which is a big factor in a bank’s decision. The higher your score, the better your chances of qualifying and getting the best prizes.

Should I stop investing in my 401(k)?

With stocks on a downward spiral, many want to know how a recession might affect their long-term investments. Should you stop invest? The short answer is no. At least not if you can avoid it. Avoid panicking and cashing out just because you can’t stand the volatility or watch out for the down arrows during a bear market.

My advice is to avoid knee-jerk reactions. This can be a good time to review your investments to ensure they are well diversified. If, for any reason, you suddenly notice a change in your risk appetite, speak to a financial professional to determine if your portfolio needs adjusting. some on the internet Robo Advisor Platforms offer customer service and can offer orientation.

Historically, it pays to hold on to the market. Investors who cashed out their 401(k)s in the Great Recession missed a rebound. Despite the recent downtrend, the S&P 500 is up almost 150% on an inflation-adjusted basis since its 2009 lows.

The only caveat is if you desperately need the money you have in the stock market to pay for an emergency expense like a doctor’s bill and there’s no other way to afford it. In that case, you might want to check 401(k) Loan Options. If you decide to borrow money from your retirement account, make a commitment to pay it back as soon as possible.

Should I wait to buy a house?

With mortgage rates With real estate prices rising and real estate prices not cooling nearly fast enough, owning could be more expensive than renting right now. A report by real estate consulting firm John Burns in April examined the cost of owning versus renting in the US and found that owning costs $839 more than renting a month. That’s nearly $200 more than at any point since 2000.

Fixed rates on 30-year mortgages have practically doubled since last spring, which has helped slow offers and cool real estate prices — but competition among buyers is still fierce due to historically low inventories. Cash offers and bidding wars continue in many markets. if you were Shopping for a home If you have worked in vain for the past month or year, you may feel exhausted and depressed.

As I specified in my newsletter: Don’t be hard on yourself. You can’t go wrong if you haven’t placed the winning bid yet. While it’s true that a fixed-rate mortgage can give you more predictability and budget stability, as long as inflation continues to outpace wages, there could be some upsides to renting for now. For one, you’re not buying a home in a bubble market that some economists say is about to burst. If you have to offload the house in a year or two – during a possible recession – you risk selling at a loss.

Second, renting allows you to keep the money you would have spent on a down payment and closing costs, and helps you stay more liquid during times of great uncertainty. So you can turn around faster and secure your finances in a downturn. Remember: cash is power.

My final note is that it’s important to remember that recessions are a normal part of the economic cycle. Long-term financial plans will always experience some downturns. Since World War II, the US has had about a dozen recessions, typically ending in a year or less. In contrast (and to give you better news) periods of expansion and growth are more frequent and longer lasting.

Continue reading: 8 ways to recession-proof your finances

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