Does the word ‘recession’ make you panic? These tips will bring a measure of peace
The start of a new year is a great time to take stock of what has happened financially in the past year and think about what changes can be made in the year ahead. Many experts are forecasting the possibility of a recession in 2023, though many believe that it is likely to be mild. Let’s take a look at what a recession could mean, and the steps you can take now to prepare and plan for the year ahead.
You’ve probably seen a lot of talk about a recession in the news lately. The most recent recession happened during the COVID-19 pandemic, and it was one of the shortest and steepest recessions in history. It was only two months long, so you might have barely noticed it — or completely missed it — given everything else that was going on. Other than that recession, if you are under 30, you really haven’t experienced one in your adult life because we just recently exited the longest economic boom in our history, from 2009 to 2020.
What is a recession?
A recession has historically and technically been defined as two consecutive quarters of declining GDP or negative economic growth. It is broadly viewed as a prolonged, wide-spread, and deep-decline in business activity. Simply said, businesses and individuals are intentionally cutting back, becoming more conservative in anticipation of a further decline in business activity and consumer spending.
So what happens in a recession?
Typically, when a recession is on the horizon, companies tend to slow hiring, slow production, and begin to trim expenses where they can. This can affect consumers in many ways. It may mean fewer hours for your job, fewer jobs available for those entering the workforce or looking for a job, and it could mean that some people may even lose jobs as companies cut back or even close down.
How to prepare
First, start a plan and don’t panic. Easier said than done, but try not to focus on things you can’t control and focus on what you can control instead. Start with your finances. Use this moment as extra motivation to trim your expenses, reduce or get out of debt and save more money. Having a plan is the first step in gaining a sense of control over your finances, regardless of what the economy is doing. Ask yourself these key questions as you begin to plan ahead:
▪ How much cash do I have on hand?
▪ How much debit do I currently have (credit cards, student loans, etc.)?
▪ What are my basic monthly living expenses, including food, shelter, insurance, utilities, transportation and childcare?
▪ Where can I trim simple expenses? (Do I really need six different streaming services? What about that daily coffee, or the number of times I eat out each week?)
▪ Are there any major life events coming up with significant expenses attached (for example, medical procedures, a baby or retirement)?
It’s time to budget
This will allow you to see where you can cut back so you can still cover essentials like gas and groceries. Budgeting also can prevent you from going into debt or spending more than you make. To create a budget, list out your monthly income, expenses and debt. Knowing where money is coming from and where it’s going can help you start to take the reins back. Try using CommunityAmerica’s Money Management tool, the Mint app or a classic Excel spreadsheet.
(Bonus budgeting tip: The 50/30/20 method: One of the most common percentage-based budgets is the 50/30/20 rule. Using this system, you will allocate 50% of your budget to needs such as housing, insurance and transportation. Then, 30% of your income goes toward wants, which can be eating out, shopping and travel. Finally, 20% of your income goes toward savings and debt. While this budgeting system is popular, it’s likely not ideal for people with significant debt to pay off.
Prioritize your spending
Your budget can help you understand the impact your spending choices today will have on your ability to meet your longer-term goals like paying off debt, saving more money, or retiring early. Now might be time to try the 50 needs/30 wants/20 savings rule to help you prioritize finances.
Although there are a few uncertainties for our economy in the year ahead, there is no need to panic. Remember, recessions are a normal part of the economic business cycle — and you will make it through to the other side. Like so much in life, having a plan, being prepared, and maintaining a positive outlook can help you persevere through anything life throws your way.
“Let’s Talk Money” is powered by CommunityAmerica Credit Union and this week’s feature comes from Senior Vice President of Community Development Amy Grothaus. If you feel as though you need to make changes to your accounts and policies ahead of a possible recession, please contact a professional Wealth or Insurance Advisor for advice.
