- Recessions can substantially impact your financial plan if you are not prepared, such as decreased income, lack of investment growth, or potentially increased cost of everyday expenses.
- Recessions can occur at any time and at any speed, so it is essential to ensure you are always prepared.
- Significant preparation steps include analyzing your budget, increasing your emergency fund, enhancing your skillset, and contributing to long-term investments.
Are We Currently in a Recession?
The recent inflation rise has economists and everyday citizens wondering if we are headed to the next recession. Two consecutive quarters of negative GDP reports signal a recession by the traditional definition, so we have technically entered a recession. However, we are still seeing reports of positive earnings growth and a strong labor market, which is not typical of a recessionary environment. These reports may trend lower in the near future, but we believe it is best to be prepared for any potential outcome. Recessions are a normal part of the economic cycle. Whether one is in the near future or some time out, here’s what to do to prepare.
What Happens in a Recession?
A recession can undoubtedly have a negative impact on your overall financial plan. Recessions are usually accompanied by a weak labor market, which means more people may find themselves without steady employment. A gap in income is a high risk to families.
As many currently know, a recession may also be associated with high inflation, which increases the cost of a household’s monthly expenses. Grocery trips, gas, and heating/cooling costs are just a few of the monthly expenses that consumers may have to budget a more significant amount towards.
Lastly, recessions often cause volatility in the stock and bond markets, which we have certainly seen so far in 2022. This volatility may hinder income potential and retirement estimates for those nearing retirement and plan to make short-term withdrawals.
How Should We Prepare for a Recession?
Recessions can occur slowly, or they can appear to happen overnight. The variability at which recessions occur suggests that households should always be prepared to endure the economic slowdown. It is much more beneficial to be proactive about the recession potential than to be reactive once the hardships begin. Nevertheless, we believe there are a few key areas that can always be improved.
1. Review Your Financial Priorities
First, analyze your monthly budget to control high or unnecessary expenses. By sticking with a consistent budget and making adjustments as needed, you will be aware of the areas that may be reduced or eliminated to free up additional cash flow.
2. Consider Your Financial Opportunities
It is important to continue to increase your income through your working years, whether through consistent pay raises, new employment, or potentially a side hustle. Enhancing and learning new skills should be a high priority to make sure you stay competitive in the workforce.
3. Build an Emergency Fund Ahead of Time
Every household should have an appropriate emergency fund just in case of a hardship, such as a loss of income. This is an excellent defense against a recessionary job loss since you would be able to afford monthly expenses for a few months while you look for new employment.
4. Stay on Top of Your Financial Investments
Lastly, for those with the extra cash flow, we want to make sure we stay on track with contributions to investment and savings accounts. Market volatility can be nerve-wracking and stressful, but it can also present the best buying opportunities for long-term investors. It is essential to stick to your financial plan since veering may affect the success rate towards your long-term goals.
Speak With a Trusted Advisor
If you have any questions about recession, your investment portfolio, taxes, retirement planning, our 401(k)-recommendation service, or anything else, please call our office at (586) 226-2100.
Please feel free to forward this commentary to a friend, family member, or co-worker. Also, if you have had any changes to your income, job, family, health insurance, risk tolerance, or overall financial situation, please give us a call so we can discuss it. We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.
Best Regards,
Zachary A. Bachner, CFP®
with contributions from Robert Wink, Kenneth Wink, James Wink and James Baldwin
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