risingpainful and fears of an impending recession are causing many Americans to worry about their financial security.
“When you have inflation and a recession together, it’s a whole different beast,” said Sam Zimmerman, CEO of Sagewell Financial, a banking company that focuses on seniors. “This is a time for action. The faster you move, the more power you have to mitigate the impact of a recession.”
Given the bleak economic outlook, what should you do with your money and how can you prepare for a potential recession?
don’t do this first
While there are money moves you can take to help drive off athat generally shouldn’t include getting out of the stock market.
“The worst thing people can do is get nervous and take money out of the market,” said Jordan Rippy, a personal finance expert and accounting professor at Johns Hopkins Carey Business School. “Most people need to be invested in the market for the long term.”
Reduce your budget
Instead, look for ways to lower your monthly budget. That can mean you can do things like subscriptions andwhile also negotiating discounts on your cable, cell phone, and other bills.
“Bill handling services are one way to lower your costs, which is a simple way to fight inflation,” Zimmerman said.
Create a spreadsheet of your expenses or use a budgeting program like Mint to organize and reduce your recurring expenses.
“If someone spends everything they take home, that shows what they spend it on and they can get more granular by looking at a bank account spreadsheet,” said Lisa Featherngill, national wealth planning director at Comerica Bank.
Pay off your debt
It is expensive to bear debt in an inflationary environment. In particular, you want to pay off credit card debt — or any kind of variable-rate debt — right away. That’s because those interest rates will rise and add more debt.
“If you have a balance on your credit card after your due date, you’re paying 15%-25% interest, so that’s a very expensive kind of debt that you carry,” Rippy said. “There’s no benefit to carrying credit card debt — it’s an ongoing drain on your personal economy.”
“You don’t want to be carrying around debt in an environment of higher interest rates or in an environment of more economic uncertainty,” added Greg McBride, chief financial analyst at Bankrate.com. “When the economy goes into recession, you may be working fewer hours or having less money coming in, but often there are still debt payments. Any debt you can get rid of now will help put you in a better position when lean times lie ahead. it’s coming.”
Fixed-rate loans, such as student loans or mortgages, tend to be less onerous.
†[Fixed-rate] debt is anchored to inflation when it wasn’t high, but your other expenses are higher. In this context, paying off your debt is a bargain,” Zimmerman said. “In a simple case, you could have a 2% mortgage that’s fixed and the inflation rate is 7% to 9%. As things get more expensive, your debt stays the same.”
Keep contributing to your 401(k)
Don’t press pause when saving for retirement. Indeed, if possible, keep the same fixed percentage of your income in† Even if the market is volatile, your assets will grow over time if you don’t try to time the market.
Known as dollar cost averaging, this approach keeps people looking beyond the usual dizzying swings in the stock market and continuing to build their nests.
“There are no magic bullets or magic tricks in personal finance,” Rippy said. “It’s a long game and people need to continue depositing their money into their retirement accounts like they’ve always done. Keep putting money into that and let it grow.”
If you’re looking to invest in sectors more resilient to recessions, gold and commodities like alcohol are generally relatively safe, Zimmerman said.
“People tend to drink when they’re happy and when they’re sad, so alcohol is an industry that tends to be recession-proof,” he said.
However, beware of highly speculative†
Create new revenue streams
Try to diversify your sources of income so that if your business shrinks and you lose your job, money is still coming in.
“This is the time for a part-time job or a hobby that you want to make something more of. It’s tremendously valuable to have multiple streams of income when there’s uncertainty,” Zimmerman said.
If you’re creative, you can turn to a platform like Etsy and sell homemade items. You can also sell unwanted household items and clothing on sites like Ebay, orlike Thredup.
“You take assets that just fall in value to make money and clean your house at the same time,” Zimmerman said. “A lot of people have a lot of stuff laying around, and if you have something of value, you can almost always sell it.”