When it comes to your family or personal budget concerns, recent economic news has certainly been gut-wrenching.
Highest inflation in 40-years and a recession on the horizon. Interest rates through the roof. Stock markets on the decline. Wages lagging behind cost-of-living increases.
But there are plenty of commonsense measures you can take right now to ensure you’re prepared for whatever gloomy fiscal reality may be coming, be it further inflation, a widespread economic slowdown or some combination thereof.
Most importantly, don’t panic. Yes, prices for basic necessities have skyrocketed and no one is predicting that will dissipate anytime soon. Yes, the Federal Reserve has raised benchmark interest rates and the cost of debt is on the rise. And, yes, opening recent 401(k) investment statements has likely been a gasp-inducing exercise.
But the expert advice is to keep cool and don’t be tempted to react by liquidating current investments as a tactic to avoid further losses. A recession could be in store, but they’re typically short-lived (the last one, amid the worst of the COVID-19 pandemic, only lasted three months.) The same is true for bear markets. And the recoveries that come on the back end of inflationary/recessionary periods create the best opportunities, in terms of gains, for those who stay the course.
Remember that investing is a long game.
“You may experience a short-term loss, but if you just hold on, history shows us that the market will recover over time,” Stephanie Genkin, a certified financial planner based in Brooklyn, told The Cut. “You don’t have to be a genius to do well in the market. You just have to have discipline.”
Address personal debt, especially the high-interest variety. The gist of the Fed’s interest rate hike strategy is to make credit and debt more expensive which, theoretically, discourages spending and slows down the economy. So, any outstanding debt you’re currently carrying that has a high fixed rate, or a floating rate that will track up with the Fed’s adjustments, needs priority attention. Credit cards are typically the worst in this category.
“Job number one for anyone with a credit card is to pay off their balances as soon as possible,” Matt Schulz, chief credit analyst at LendingTree, told The Washington Post. “When a recession may be on the way and interest rates are rising rapidly, it’s even more important.”
According to the Post, one way to tackle the debt is to get a low-interest personal loan or sign up for a balance-transfer credit card. You can dig out of the debt a lot faster if you transfer high-interest debt to a credit card with a 0% rate.
If you can’t qualify for a zero-interest credit card, call your current credit issuer and ask for an interest rate reduction, Schulz suggested. “About 70% of people who asked for one in the last year got one,” Schulz said. “But far too few people ask.”
Stash that cash, but not under the bed. Financial advisers suggest we should all have savings in reserve that can cover three to six months of our living expenses. Easier said than done and particularly so for individuals and families that may already be scraping to keep up with big recent jumps in the cost of basic necessities.
“For many people right now, this inflation problem is akin to an emergency,” Mark Hamrick, senior economic analyst for Bankrate.com, told The Washington Post.
You don’t want to have to resort to debt if you lose your job or because your wages aren’t keeping up with historically high inflation, he said.
The upside to recent increases in borrowing rates is upward movement (though not a lot) in saving vehicles like bonds or certificates of deposit, though savers should be thoughtful about how much cash to lock up in time-constrained accounts.
Make a plan, and do it now. Preparation for a harder slog is critical, but you should also be ready to navigate worst-case scenarios. What would be your first step after an unexpected job loss? Can you make budget adjustments now, ahead of any potential future economic deterioration, to be in a better position to weather the storm?
“I like to think of this weird, uncertain period as an opportunity to be proactive,” Farnoosh Torabi, an editor-at-large at CNET Money, told The Cut. “We can still make moves now without the real pressures that come with a recession like unemployment or a loss of income.”
Where could you turn for help? Could you move in with your parents or a sibling if you had to? What else would you be prepared to do? If you had to get by on a bare minimum, what would that look like? Per The Cut, financial educator Tiffany Aliche calls this her “noodle budget,” and has some useful tips for living on it here. Hopefully you’ll never be in this situation, but it’s smart to have a plan so that you’re not reacting blindly (and potentially making bad decisions) if the worst should come to pass.