Living a financially smart life can be difficult even when everything is going well: great job, healthy mental space, a stock market fattening up your 401(k). But in the midst of economic turbulence (a recession, perhaps?) it can be downright impossible—if you don’t have a clear game plan.
So today, we’re going to set you up with a simple six-step guide on prepping your money so you can feel secure, even in the worst of times.
The Tea
The U.S. isn’t suffering from an economic recession right now. But for many Americans, it sure seems like we’re in a recession, and many economists and market strategists believe an official recession is right around the corner.
- Scott Wren, Senior Global Market Strategist for Wells Fargo Investment Institute, says the economy “will likely eventually tip into a moderate recession later this year.”
- Goldman Sachs Economic Research wrote in March that “we are raising our subjective probability that the U.S. economy will enter a recession in the next 12 months … to 35%, reflecting increased near-term uncertainty around the economic effects of small bank stress.”
- “While a recession is not likely in the immediate future, signs indicate that the economy is continuing to slow, and a recession may appear by year-end,” says Brad McMillan, Chief Investment Officer for Commonwealth Financial Network.
The data, for now, says otherwise. The U.S. Bureau of Economic Analysis (BEA) reported that in the most recent quarter (the fourth quarter of 2022), America’s gross domestic product (GDP) grew at a 2.9% annualized rate—a little slower than Q3’s 3.2%, but better than the 2.8% expected by a group of economists.
(Why does this matter? Because most recessions—which are officially designated by the National Bureau of Economic Research (NBER)—feature two back-to-back quarters of GDP drops. Interestingly, the U.S. suffered GDP declines in Q1 and Q2 of last year, but the NBER determined we were still not in a recession.)
However, what a recession is and what one feels like are two very different things.
The majority of Americans can’t tell you the technical definition of a recession, according to a poll by Cinch Home Services. But three-quarters of them believed the U.S. fell into one last year, illustrating very real financial anxiety amid rocketing inflation.
More recently, a Marqeta survey of people in the U.S., U.K., and Australia showed that more than half of respondents had changed their household budgets in response to recent headlines about the economy.
YATI Tip: Thinking about making a budget of your own? Here’s how to make simple budgets in a spreadsheet.
In other words: Recession or not, people are already feeling economic pain. And that pain could become even sharper over the next year or so, when many experts believe the U.S. will fall into an actual recession.
But you can protect yourself from that pain by being proactive now.
The Take
George Washington, Sun Tzu, and a lot of football coaches would tell you that “the best defense is a good offense.” So rather than waiting for something bad to happen and acting then, we suggest taking action ahead of time.
You’ll also need a plan, of course. For that, let’s lean on the team at U.S. Bank Wealth Management, which recently talked to Young & The Invested about their six-step plan that anyone can use to put their financial picture together before economic uncertainty strikes.
- Meet with a financial professional to review or create a financial plan: A financial plan outlines how much money you bring in, how much of it you plan on spending (and where you’ll spend it), how much of it you’ll plan on saving, and how much you can expect those savings to grow by various benchmarks throughout the years. But a truly great plan will also account for major life hurdles, such as temporarily losing a job. So if you don’t have a financial plan, now’s the time to make one—and if you have one, make sure it’s up to date with your most accurate information.
- Stick with your investment strategy, even during market ups and downs: The last thing you should do is abandon your investment app—in fact, we emailed you last August about the importance of not sleeping on stocks. U.S. Bank Wealth Management agrees; regardless of how bad things get economically, “you should plan to generally stay the course with your portfolio,” they say. “If you pulled your money out of the market with stocks at their lows, you’d lock in losses and would miss out on the rebound. Plus, there are always tax ramifications to consider carefully before selling investments.” U.S. Bank adds that it’s important to keep a diversified portfolio—most people will invest in stocks, then add bonds, real estate, and other alternative investments depending on how much (or little) risk they want to take on.
- Get a handle on budgeting: “One of the biggest mistakes people make is not having a budget – and not knowing what they’re spending their money on,” U.S. Bank Wealth Management says. “An up-to-date budget can provide the full picture you need to make smart financial decisions.” As it pertains to prepping for an economic downturn, it can illuminate expenses you might be able to cut, such as subscription services you one used but have since stopped watching. It can also help you determine what debt you should prioritize paying off (general tip: the higher the interest you’re paying, the higher a priority it should be).
- Plan for unexpected expenses during a recession: People lose their jobs in a recession. It’s just a fact of life. But you can limit the financial damage by building an emergency fund. “Start setting funds aside in a money market account, high-yield savings account or other option where your money can grow and will be easily accessible. A general rule of thumb is to save three-to-six months’ worth of household expenses, but how much you need really depends on your personal circumstances” U.S Bank Wealth Management says. They also suggest getting approved for a line of credit in case you eventually need money quickly; with lines of credit, you don’t pay interest unless you borrow against the line.
- Prepare for a possible job search during a recession: Also, if you lose your job, you’ll probably want to bounce back into the workforce ASAP. Update your resume and/or portfolio site. Stay active with professional networking sites. Even consider a side gig. “Think of ways to earn cash by doing something you enjoy, like pet sitting, freelance writing or teaching people how to knit,” U.S. Bank says. “There’s always a chance that a successful side job can develop into a full-time career.”
- Take measures to thwart fraudsters during a recession: Scammers don’t quit scamming just because the NBER finally says we’re in a recession. In fact, that can make their job a little easier. When people experience economic hardship, they can get desperate, and the hope of new money can cloud over clear red flags. Keep an eye on your bank and credit card activity log, and/or set up security alerts. “Make it a habit to look over your credit reports from Equifax, Experian and TransUnion to confirm that there’s no suspicious activity there either,” U.S. Bank Wealth Management adds.
No one enjoys talking about recessions, let alone planning for them. But a little time, effort, and sacrifice now can spare you from a lot of anxiety and financial setbacks later.
Have a great weekend, and we’ll see you again next week!
Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.