Financial advice for weathering a recession. What to know about layoffs, debt and investing

This story is part So Money (subscribe here)an online community dedicated to financial empowerment and advice, led by CNET Editor at Large and So Money podcast host Farnoosh Torabi.

What is happening

A growing number of financial experts say the United States is heading into a recession, defined as two consecutive quarters with a large and widespread decline in economic activity.

why is it important

Recessions are historically marked by widespread layoffs, bankruptcies, higher borrowing costs and stock market turbulence.

And after

Gather facts to protect your financial situation. No one can predict the future, and it is important to act calmly and deliberately.

As inflation continues to rise and as the Federal Reserve braces for another rate hike, economists and financial experts fear a recession is inevitable. Technically, the country is in a recession when gross domestic product, the value of all goods and services produced during a given period, falls for two consecutive quarters. In the first three months of 2022, US GDP fell by 1.4%. While the National Bureau of Economic Research makes the official call of a recession, we will know on Thursday when the Bureau of Economic Analysis (BEA) releases its second-quarter advanced estimate of whether the United States meets the criteria for a recession.

In an aggressive effort to control inflation by slowing the economy, there are also fears that the Fed could plunge the country into a painful recession. Historically, to bring down inflated consumer prices, the Federal Reserve raises the federal funds rate, which makes borrowing more expensive. But all three rate hikes this year, including last month’s, which was the largest in nearly three decades, have not reduced inflation. It stands at 9.1%, more than four times higher than “normal”.

Federal Reserve Chairman Jerome Powell acknowledged the risk of a recession during a European Central Bank Forum Wednesday. But he also noted: “I would disagree that this is the biggest risk to the economy. The biggest mistake to make…would be not to restore price stability.”

As we brace for the storm with rising recession fears, more and more of us are thinking about finances and jobs. The My So Money podcast audience sent in a number of recession-related issues on the best way to prepare, to register, invest and make smart money moves in these uncertain times. Here are some tips to help you get through this tough financial time.

First, what might we see in a recession?

It is always useful to go back and examine the results of the recession so that we can manage our expectations. While each recession varies in duration, severity and consequences, we tend to see more layoffs and a slight increase in unemployment during economic downturns. Access to the credit market could also become more difficult and banks could be slower to lend, as they worry about default rates.

Read more: The economy is scary. This is what history tells us

As the Federal Reserve continues to raise rates in an attempt to rein in inflation, we will see an even bigger increase in borrowing costs – for mortgages, car loans and business loans, for example. So even if you get a loan or a credit card, the interest rate will be higher than it was the year before, which will make it more difficult for households to borrow or repay their debts. We are already seeing this in the housing market, where the average rate on a 30-year fixed mortgage was recently approaching nearly 6%, the highest level since 2009.

During recessions, as rates rise and inflation slows, the prices of goods and services fall and our personal savings rates could rise, but it all depends on the labor market and wages. We could also see an increase in entrepreneurship, as we saw in 2009 with the Great Recession, as newly unemployed people often look for ways to make a small business idea a reality.

Should I expect layoffs?

With an unemployment rate of 3.6%, the labor market may seem to be, at least for now, the only stable part of the economy. But that will likely be temporary, as companies struggling with the current financial headwinds — including inflation, rising interest rates and weakening consumer demand — have already started announcing layoffs. According Layoffs.fyia website that tracks job losses at tech startups, there were nearly 37,000 startup layoffs in the second quarter of 2022. This week, Shopify announced reduce its workforce of about 10% or about 1,000 layoffs. CEO Tobi Lutke said the e-commerce company’s pandemic-focused growth plans “have not paid off”.

During the Great Recession, unemployment peaked at 10% and it took an average of eight to nine months for the unemployed to find a new job. So it might be time to review your emergency fund if you think there is a shortfall. If you are unable to cover a minimum of six to nine months of expenses, which is difficult for most people, see if you can accelerate the savings by reducing expenses or generate extra money. It’s also a good time to make sure your resume is up-to-date and to network with influential people in your professional and personal network. Whether you are firedmake sure you apply for unemployment benefits right away and secure your health insurance.

If you’re self-employed and worried about a potential downturn in your industry or a loss of customers, explore new sources of income. Also aim to increase your cash reserves. Again, if previous recessions have taught us anything, it’s that having money unlocks choices and leads to more control in tough times.

Should I expect the interest rates on my debt or loan to rise?

Like the Federal Reserve keep raising interest rates in an attempt to curb inflation, adjustable interest rates are expected to rise – thereby increasing credit card APRs and ready, and make the monthly payments more expensive. Ask your lenders and card issuers about low interest credit options. See if you can refinance or consolidate your debt with a single fixed rate loan.

During past recessions, some financial institutions were reluctant to lend as often as they did in “normal” times. This can be confusing if your business relies on credit to grow or if you need a mortgage to to buy a house. It’s time to pay close attention to your credit score, which is a determining factor in a bank’s decision. The higher your score, the better your chances of qualifying and getting the best rates.

Should I stop investing in my 401(k)?

With stocks in a downward spiral, many want to know how a recession could affect their long-term investments. Should we stop invest? The short answer is no. At least not if you can help it. Avoid panicking and cashing out just because you can’t stand the volatility or watch the down arrows during a bear market.

My advice is to avoid knee-jerk reactions. Now might be a good time to review your investments to make sure you’re well diversified. If you suddenly notice a change in your risk appetite for any reason, discuss it with a financial expert to determine if your portfolio needs adjustment. some online robo-advisor the platforms offer services to customers and can provide advice.

Historically, it pays to stay true to the market. Investors who cashed in their 401(k)s during the Great Recession missed a rebound. Despite the recent decline, the S&P 500 is up nearly 150% since its lows in 2009, adjusted for inflation.

The only caveat is that if you desperately need the money you have in the purse to pay for an emergency expense like a medical bill, and there’s no other way to afford it . In that case, you might want to check out 401(k) loan options. If you decide to borrow from your retirement account, commit to paying it back as soon as possible.

Should I wait to buy a house?

With mortgage rates rising and housing prices are not cooling fast enough, owning could be more expensive than renting right now. A report from the John Burns Real Estate Consulting The company looked at the cost of owning versus renting in the US in April and found that owning costs $839 more per month than renting. That’s nearly $200 more than at any time since 2000.

Fixed 30-year mortgage rates have nearly doubled since last spring, which has helped slow supply and cool housing prices — but competition between buyers is still fierce due to historically low inventory. Cash bids and bidding wars continue in many markets. If you have been shopping for a house past months or year to no avail, you may feel exhausted and defeated.

Like I mentioned in my newsletter: Don’t be hard on yourself. You’re doing nothing wrong if you haven’t offered the best deal yet. While it’s true that a fixed-rate mortgage can give you more predictability and budget stability, as long as inflation continues to outpace wages, there could be some upsides to renting right now. For one thing, you’re not buying a house in a bubble market that some economists say is soon burst. If you have to unload the house in a year or two – during a possible recession – you risk selling at a loss.

Second, leasing allows you to keep the money you would have spent on a down payment and closing costs, and will help you stay more liquid during a time of great uncertainty. This allows you to pivot faster and secure your finances in the event of a downturn. Remember: money is power.

My final note is that it is important to remember that recessions are an integral part of the business cycle. Long-term financial plans will always experience periods of decline. Since World War II, the United States has experienced a dozen recessions and they usually end after a year or sooner. On the other hand (and to give you better news), periods of expansion and growth are more frequent and longer lasting.

Read more: 8 Ways to Protect Your Finances Against the Recession

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