Prepare for the worst, hope for the best
The year was not excellent for the markets. Economists in Europe and the United States have become increasingly cynical in their predictions for the near future, and many believe a recession is inevitable. They are not alone either. A recent CNBC CFO Council survey interviewed 22 chief financial officers of large corporations, from mid-May to early June. Sixty-eight percent of CFOs surveyed believe a recession will occur in the first half of 2023. Nobody respondents believed we would avoid a recession; similarly, no one had forecast the recession beyond the second half of 2023.
It seems that a recession is inevitable. It is not a question of “if” but of “in how long”. This begs the question: what can you do to prepare?
What is a recession?
The easiest way to describe a recession is to use the definition established by the National Bureau of Economic Research (NBER), the de facto authority when defining the parameters for the start and end of recessions. 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 and retail sales”.
The economy moves in cycles and recessions are an inevitable facet of economic activity in any country.
How long do recessions last?
The NBER is a wealth of economic data and tracks the average length of historical recessions. After World War II, recessions lasted an average of 11 months.
Hear from the experts
Although there are differing opinions among economists and financial executives, the preponderance of experts believe that a recession next year is a certainty. Should we prepare for the worst? Weighing your options, it’s a pragmatic resolution with little to no downside.
Since most experts predict the economy will enter a recession in the first half of 2023, you have about five months to prepare for the worst. There are few risks in this. If a recession hits within the next year and you’ve been preparing for months in advance, you’ve used your time wisely and properly prepared your household for the recession. However, if we ever hit a recession and the economy picks up, you now have an emergency fund that will give you peace of mind. Also, 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 prepare for a recession. Depending on one’s financial situation, some methods may work best, while others may not be the most constructive. However, idleness is the only action that can almost certainly lead to disaster. Here are some steps you can follow:
Debt management: Take a deep dive into 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 a great step to take. Instead of paying a few hundred extra dollars on your mortgage, take that money and put it on the most damaging debt first.
Think of it this way: if you were a firefighter, which fire would you put out first: the biggest fire (your mortgage) or the fastest growing (your credit card debt)?
Stress test: Take a look at your debt, expenses and all sources of income. How much of your income could be reduced or eliminated before you hit a rough patch? What are the essential expenses and what can you do without? If you have to start cutting your expenses, who will go first (Netflix and $8 coffees) and which expenses are essential (phone bill and internet)?
Run different scenarios, in which you describe the potential eventualities. Say you’re working remotely right now and saving 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, especially with skyrocketing gas prices? There are many plausible scenarios in your future. Make sure you have a plan for as much as you can.
to safeguard: 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. It can also be done in conjunction with your stress test.
Suppose you are living comfortably now, but decide that you can reduce your expenses. You cancel some subscriptions, stop eating out so much, and now you’re saving $250 a month. A short-sighted person might see the extra $250 simply as money to spend elsewhere, like Amazon. A savvy person, on the other hand, could put that money into an emergency fund or invest more in assets like IRAs and money market accounts.
However you use the money you save, make sure it works for you.
Invest in yourself: When a recession hits, the labor market becomes much more competitive. Making sure your resume stands out is imperative if you think you’ll be on the job market soon. If you’re already saving money, it might be a good idea to invest some of those funds in professional resume services.
If you’re someone who can make time for gigs and side jobs, now is a great time to consider the costs and time involved. Is this an interesting source of additional income for you?
Inaction is a choice (and a bad choice)
Everyone’s situation is different, and everyone’s best course of action will be too. As the COVID-19 pandemic has taught us, unexpected things can and do happen, and circumstances can change abruptly. Many experts warn of a coming recession. As we know, recessions are an economic certainty, part of the cycle. Choosing to do nothing and hoping for the best is a choice, albeit a debatable one. Preparing for the worst, while remaining optimistic for the best, is a much better option.
The Epoch Times Copyright © 2022 The views and opinions expressed are those of the authors. They are intended for general informational purposes only and should not be construed or construed as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or other personal finance advice. Epoch Times assumes no responsibility for the accuracy or timeliness of the information provided.