Budgeting

Looking Toward Recession: Prepare for the Worst, Hope for the Best

BY Ty Flores TIMEJuly 6, 2022 PRINT

It has not been a great year for the markets. Economists in Europe and the United States have become increasingly cynical in their predictions for the near future, and many feel that a recession is inevitable. They are hardly alone, either. A recent CNBC CFO Council survey interviewed 22 chief financial officers from major companies, from mid-May to early June. Sixty-eight percent of the CFOs interviewed believe that a recession will occur within the first half of 2023. No one interviewed believed that we will avoid a recession; likewise, no one forecasted the recession later than the second half of 2023.

It appears that a recession is inevitable. It’s not a question of “if” but “how soon.” This begs the question: what can you do to prepare?

What Is a Recession?

The simplest way to describe a recession is to use the definition set by the National Bureau of Economic Research (NBER), the de facto authority when defining the parameters for when recessions begin and end. The NBER defines a recession as: “A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.”

The economy moves in cycles, and recessions are an inevitable facet of any nation’s economic activity.

How Long Do Recessions Last?

The NBER is a wealth of economic data and tracks the average length of historical recessions. Post World War II, recessions lasted an average of 11 months.

Listen to the Experts

While there are dissenting opinions among economists and financial leaders, the preponderance of experts believes a recession in the next year is a certainty. Should you prepare for the worst?  Weighing your options, it’s a pragmatic resolution with little to no downside.

Since most experts predict some time in the first half of 2023 to be when the economy will enter a recession, you have around five months to prepare for the worst. There is little risk to this. If a recession does hit within the next year and you have been preparing for months in advance, then you have used your time wisely and adequately prepared your household for the downturn. However, if we never hit a recession and the economy climbs upwards, you now have an emergency fund that will afford you peace of mind. Plus, if this happens, the economy is doing better, and a rising tide lifts all boats.

How to Prepare for a Recession

There are several different strategies to preparing for a recession. Depending on each person’s financial situation, some methods may work better, while others may not be the most constructive. However, idleness is the one action that can almost certainly spell disaster. Here are some steps you can take:

Debt Management: Take an in-depth look at your debt. Classify your debt into “good debt” and “bad debt.” A mortgage with a reasonable interest rate would be considered “good debt,” while credit card debt with high-interest rates would be considered “bad debt.”

Prioritizing bad debt over good debt is an excellent action to take. Instead of paying a few extra hundred dollars on your mortgage, take that money and put it toward the more damaging debt first.

Look at it this way: If you were a fireman, which fire would you put out first—the biggest fire (your mortgage) or the fastest-growing fire (your credit card debt)?

Stress Test: Take a broad look at your debt, your expenses, and any and all income streams. How much of your income could be reduced or eliminated before you hit a tough spot? What expenses are essential, and what can you do without? If you need to start cutting your expenses, which will be the first to go (Netflix and $8 coffees) and what expenses are essential (phone bill and internet)?

Run through different scenarios, in which you outline potential contingencies. Suppose you are working remotely right now—and saving on gas—but your employer wants you to come back to the office five days a week. Can you fit the extra gas into your budget and maintain a comfortable lifestyle, particularly with excessive gas prices? There are plenty of plausible scenarios in your future. Make sure you have a plan for as many as you can.

Save: Saving money is always a solid option. Whether you invest it or keep it in a savings account is up to you, but avoiding frivolous and unnecessary spending habits is a great option, requiring some discipline. This can also be done in conjunction with your stress test.

Say you are living comfortably now, yet you decide you can reduce expenses. You cancel some subscriptions, stop eating out as much, and now you’re saving $250 a month. A short-sighted person might see the extra $250 simply as money to spend somewhere else, like Amazon. A savvy person, on the other hand, might put that money in an emergency fund or invest more in assets such as IRAs and money market accounts.

However you are using the money you save, make sure that it is working for you.

Invest in Yourself: When a recession hits, the job market becomes a lot more competitive. Making sure your resume stands out is imperative, if you believe you will soon be in the job market. If you are already saving money, it may be a good idea to put some of those funds into professional resume services.

If you are someone who can divert time toward gigs and side-work, now is a great time to consider the costs and time involved. Is this a worthwhile source of extra income for you?

Inaction is a Choice (and a Poor One)

Everyone’s situation is different, and everyone’s best course of action will be as well. As the COVID-19 pandemic taught us, unexpected things can and do happen, and circumstances can change abruptly. Many experts are warning of a coming recession. As we know, recessions are an economic certainty—a part of the cycle. Choosing to do nothing and hoping for the best is a choice, albeit a questionable one. Preparing for the worst, while still remaining optimistic for the best, is a far better option.

The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.

Ty Flores
You May Also Like