Half of Americans Say They’d Face Financial Ruin in a Recession
While economists are having trouble predicting if and when a recession will hit, many Americans believe one is inevitable. Three-quarters of Americans (75%) worry there will be a recession in 2023, while 69% say one is already here, according to a new Real Estate Witch poll.
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Even more alarming, more than half of Americans (55%) said they would lose everything if a recession occurred.
“Although the job market is strong and wages are rising, many Americans are at risk financially simply because the cost of living is rising faster than income,” said Jaime Seale, data writer at Clever Real Estate. “That causes Americans to dip into savings, retirement accounts or lean on high-interest credit cards. Once in debt, that can make it more difficult to get back on track financially.”
On a positive note, the majority of people (87%) said they are taking steps to prepare for a possible recession. Here’s a look at the ways Americans are prepping for an economic downturn — and which ways are the most effective.
Saving More Money
The majority of people (44%) said they are saving more money to prepare for a recession, which is a smart money move.
“One of the best ways to prepare for a recession is to put savings in an emergency fund to cover three to six months of expenses,” Seale said. “Americans should be able to draw from this account immediately if they lose their job or have an unexpected emergency.”
Having an emergency fund can help people stay out of debt, which is particularly important during a recession.
“Interest rates tend to rise during a recession,” Seale said, “and, if consumers have a variable rate, like on many credit cards, they could pay hundreds or even thousands of dollars extra each month, putting even more pressure on their finances in tough economic times.”
Other measures Americans are taking to prepare for a recession include cutting back on non-essential spending (44%) and taking on additional income (32%).
Paying Off Debt
Nearly one-third of Americans (30%) said they are prioritizing paying off debt as part of their recession prep. This is also a smart move, as interest rates tend to rise during recessions; debt could become even more of a financial burden.
“Experts say building an emergency fund and reducing debt should be consumers’ top two priorities,” Seale said, “but they also suggest holding off on large purchases, if possible, so they can focus on saving.”
Holding off on major purchases also can mean not taking on any additional debt; 32% of people surveyed said they are delaying big purchases.
What Not To Do
Some Americans are selling off investments to prepare for a recession; 17% said they are taking money out of the stock market. However, this is probably not the best way to prepare your finances for an economic downturn.
“For Americans with investments, it’s better to hold onto them rather than sell,” Seale said. “Although it can be nerve-wracking to watch values fall, investors will generally make more money the longer they wait to sell. If possible, it’s actually advisable to keep investing. Bonds offer a safe return on investment, even if the return is smaller than what you’d get with stocks.”
An additional 17% of people said they are taking money out of retirement savings.
“It’s also generally not a good idea to withdraw money early from a retirement account, such as a 401(k),” Seale said. “There are usually penalties and tax consequences that will cost more than you might think. A retirement fund is there for retirement and, by withdrawing cash early, it could put Americans in a bad financial position down the road.”
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