What is a recession?

Two or more sequential quarters with a significant,

pervasive decline in economic activity.

In the last week, the Federal Reserve announced their highest interest rate increase in almost three decades, raising rates by 75 basis points in an attempt to control the unbridled inflation that hit new levels at 8.6% just last month in May.

Financial experts have been monitoring the gross domestic product, or GDP – the value of all goods and services produced within a country during a specific period of time – as it is a key metric used to determine the growth or recession of the economy. Within the first quarter of 2022, the US GDP declined by 1.4% most likely due to an increase in COVID-19 cases coupled with a rising inflation. Compounded with the war in Ukraine and instability in the stock market, economic distress just grew. The moment GDP falls during two consecutive quarters, the country is technically then in a recession. The National Bureau of Economic Research makes the official call and we have yet to hear it.

The possibility of an impending recession in the US comes with many anxieties, concerns, and even some curiosity about what this momentous occurrence means for your finances. Well, we are here to help and provide guidance, or at the very least shed some light on this difficult financial period for us all.

When facing a recession due to the Federal Reserve’s hike on interest rates and subsequent consequences of decreased spending, begin to prepare your financials to weather the road ahead.

Okay, so what typically happens during a recession?

To best manage expectations of the future, one must first review outcomes of the past. Every recession has its own variances in terms of length, severity, and associated consequences. According to history of past recessions, consequence that reiterate themselves are layoffs, and a decreased accessibility for credit as banks and lending institutions are generally slower to lend as default rates generally increase in times of economic downturn.

Assuming the Federal Reserve continues to increase rates to tamp down on inflation, there is a likely chance we see an increase in borrowing costs. Read our blog on A Shift in the Market Tide to learn about how the increase in rates is already affecting the real estate market for both buyers and sellers.

Remember, with all dark clouds there is a silver lining. In a recession, the lining is that as rates go up and inflation takes a cool down, it results in the fall of prices on goods and services and an increase in our personal savings rates as the APY’s increase from a formerly chart topping 0.5% to 1% depending on the establishment you bank with and of course, the labor market and wages. Another trend seen over past recessions, such as the Great Recession of 2009, is an uptick in entrepreneurship as the newly unemployed seek creative ways to turn small business ideas into a reality or even make their hobbies profitable.

What can we do to prepare and protect ourselves?

Hope for the best, plan for the worst. Control what you can control. Here is a checklist covered in this video by CNET that we feel is a great tool to utilize in order to prepare yourself and protect your financials from a potential recession:

  1. Review your goals: go over your one year and two year financial goals to make sure you are still on track to accomplish them. If you’re not, decide what levers you can pull to ensure you can still make them happen.

    Federal Recession Preparation
    Reviewing your financials to prepare for a potential recession is key.
  2. Reduce spending and stock up on cash: review your current spending habits and your budget. Unplug from recurring costs that are not essential and do not align with your goals, like your list of subscription box memberships you forgot about anyway. In recessions, cash is king. During the 2009 recession, it took laid off workers 8-9 months to find a new job. Make sure you have a safety net in place to cover your essential costs in the case you find yourself laid off.
  3. Consider a side hustle: consider ways in which you can bring in additional revenue streams to support your monthly fixed costs and savings goals! Make a list of the gigs you can do on your off hours to help you build a bigger emergency account like dog walking, getting crafty with a Cricut, driving for Uber, or becoming an Instacart shopper, just to name a few.
  4. Consolidate debt: streamline your payments and get a lower rate!

Should I stop investing in my 401(k)?

We understand the fear that ensues from a downward spiral in the stock market and with the current market doing just that over the last few weeks, people want to know how a recession could impact their long-term investments. A question everyone has is: “should I stop investing?” The answer: absolutely not. At least, not if you can help it. Many want to panic and cash out because they don’t want to face the volatility and downward arrows.

Financial experts advise to avoid making split-second or impulsive reactions as recessions may actually be a good time for you to review your investments and ensure you’re well-diversified. To avoid making any detrimental decisions on your own, please consult a financial advisor before doing so to determine if your portfolio needs any adjusting to protect your investments or even to take a risk on the market. Historically, sticking with the market pays off. Investors who cashed out their 401(k)s during the Great Recession missed the boat on the rebound. The S&P 500 – Standard and Poor’s 500, is a stock market index that tracks the stock performance of 500 large companies that are listed in the United States and is one of the most followed equity indices – has seen significant increases, nearly 150%, since its historic lows in 2009, adjusted for inflation of course.

We hope that by now you have a better idea of what a recession is, how it occurs, what to expect, and the best ways to protect your finances during times of economic discourse. Remember, consult a financial advisor before making drastic changes or decisions to your accounts and to ensure that you are best protected in the case a recession does occur. No one can predict the future, it’s imperative to remain calm, gather facts, and make deliberate moves to remain protected in your financial position.

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