Tue. Jan 31st, 2023

How Do You Prepare Your Finances For A U.S. Recession?

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Is a Recession Around the Corner?

While U.S. consumers are still reeling from months of price inflation on most goods and services, another economic challenge may be lurking just around the corner: recession.

Experts and financial institutions are seeing signs that we are headed for recession, perhaps in just a few months. Billionaire banker Jamie Dimon estimates the U.S. will be in a recession in the middle of next year. Europe already is in recession and we’re likely to be there in six to eight months from now.

Fed Vice Chair Lael Brainard cites several reasons she believes we are headed for recession, including rapid interest rate increases by central banks around the globe in efforts to tamp down inflation. Brainard also noted there are indications that most American households have less of a financial cushion than previously estimated. That means they will likely be spending less, slowing recovery from a recession.

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The International Monetary Fund recently cut its global growth forecast for 2023 amid colliding pressures from the war in Ukraine, high energy and food prices, inflation and sharply higher interest rates, warning that conditions could worsen significantly next year.MORE FROMFORBES ADVISOR

The Federal Reserve and other central banks have been pushing up interest rates sharply to try to curb inflation–a delicate balancing act. The IMF said increasing interest rates too quickly could push the global economy into an “unnecessarily severe recession” and cause disruptions to financial markets and pain for developing countries. Still, the IMF said, it was more important to control inflation.

A recent probability model run by Ned Davis Research put the chance of a global recession at 98.1%. The recession model has been this high previously only during severe economic downturns, including during the global financial crisis of 2008 and 2009.

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If the experts are right, what can you do to prepare for a recession and ride it out with as little financial pain as possible? Here are some important steps to take now:

Start socking away cash in an emergency fund. You need to have a cushion of three to six to months of income. With interest rates up, look at short term CD’s or savings accounts.

Pay Down Your Debts. Paying off your credit will free up money in the future. The Fed has been increasing interest rates and that means you are paying more for your debt.

Increase your credit limits or apply for a home equity loan (just in case). Understand that this money is not to be tapped, except as a last resort.

Make an appointment with your financial advisor. Discuss your investment portfolio and risk level and goals. Reallocate your assets if you are worried. Meet with your financial advisor and set up a financial plan for the coming year.

Hold tight but stay informed. Investing is a long-term process that takes patience and a willingness to not let emotions dictate investment decisions. Keep some money on the sidelines and don’t rush to buy when the market corrects — no chasing a falling knife. Wait until there are signs of global market stability before putting more money to work through investing.

Keep your retirement savings on track. Continue to invest if you have several years before retirement but you should probably talk to your advisor to see whether you need to rebalance your plan.

Add to your income if possible. Market corrections translate into long-term investing opportunities but you can’t invest more if you don’t have money to do so. Taking on overtime or freelance gigs are just some of the ways you might be able to earn more money to invest. Review and update your LinkedIn profile and your resume and collect endorsements from those you work with.

Pare down your spending, and make sure your budget is up to date. We offer free, downloadable budget worksheets on our website.

If you are near retirement you may want to work a few more years to add to your retirement accountsWith interest rates rising, tools such as bond-ladders can turn a retirement account into a regular stream of income, mimicking a paycheck.

Talk to your kids about the household budget. Get everyone on the same page and use this opportunity to teach your kids about money.

SOURCE https://www.forbes.com/sites/winniesun/2022/11/18/how-do-you-prepare-your-finances-for-a-us-recession/?sh=4028d475322b

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