- Some financial analysts predict that there will be a recession in the next 12 months.
- A recession, accompanied by inflation and rising interest rates, could have a real impact on Americans’ wallets.
- It’s time to make your finances more resilient before the economic downturn begins.
With inflation at its highest level in 40 years and rapidly rising interest rates, consumers could face a recession. The Conference Board assesses the probability of a recession in the United States at 96% over the next 12 months.
Consumers are already facing higher grocery and utility bills. A recession is usually accompanied by job uncertainty, tighter lending policies by financial institutions, and slower investment growth. All this leads to a possible recession jeopardizing the financial security of consumers.
Preparing for any nasty recession-induced consequences should start long before an economic downturn begins — and it’s not too late, according to Jamie Hopkins, Certified Financial Planner and personal finance and retirement expert. He believes there are concrete steps investors and consumers can take to protect their financial goals. In “Find Your Freedom,” a forthcoming book he co-authored, Hopkins says working with a financial planner will allow you to live your best life by design, not by default. His goal with this book is to help people retire better and find the freedom to use their money well.
He shared with Insider his top strategies for protecting your finances before and during a financial downturn.
Be smarter with your money
Many people who see a recession on the horizon might immediately start selling their investments and want to keep their money in a regular savings account; Hopkins warns against this.
“Keeping your money in the bank isn’t the best thing to do. If you can be strategic and smart during recessions, it can be a good time to invest,” Hopkins said.
He added: “Look for cash equivalents like an ETF. If you’re looking for a place to store money, there are market funds and REITs. Having too much money in the bank during this time can lead to opportunities of missed investment growth.”
Postpone expensive purchases for a while
Experts generally advise against spending more than 30% of your net income on discretionary purchases. With high inflation and rising interest rates, it would be better to defer large expenditures that are not needed.
“If you can put off buying a house, an expensive vacation, etc., it’s reasonable to do so,” Hopkins said. “Since we are heading into uncertain times economically, it is best to keep discretionary buying to a minimum until we are back on solid footing.”
How do you manage your debt?
In troubled economic times, the first thought may be to try to pay off all debts, but having access to this money for emergencies or investment opportunities may be a better use of these funds.
“There’s a difference between high-interest negative credit card debt and a low-interest mortgage or line of credit for emergencies,” says Hopkins. “Being in a position where you can respond effectively to emergencies or even job loss allows you to be better prepared for an economic downturn.”
Stay on track with your investment portfolio
If you are nearing retirement, consider having all the withdrawals you would make in cash on hand.
“If you plan to have, for example, the first 2 years of your retirement withdrawals in cash and loans, you won’t worry at this time about what the market is doing and the impact of inflation and interest rate on your portfolio,” Hopkins said. .
It is also important not to make hasty decisions with your portfolio. “Think about where you are right now and don’t do anything to jeopardize that based on short-term economic events. The length of retirement is typically 20 years, a recession will most likely last a year,” Hopkins said.
Prepare your finances before the onset of the economic downturn
Taking steps to prepare for the economic downturn before it happens will eliminate the stress and panic that can occur during a recession.
“I can’t stress this enough: don’t wait until the last minute and don’t panic, you’ll almost always make the wrong financial decision when it’s based on stress and panic,” Hopkins said. “If you’re feeling nervous about your financial situation as a recession approaches, consider what steps you can take to strengthen your financial situation.
“It’s times like these that having a financial plan is essential. If you have a good financial and investment strategy, you’ll be in a strong financial position no matter the recession.”
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