You may have heard predictions of an impending recession numerous times in the past year, and you might be wondering whether it’s actually true. Here’s how to manage your money during a recession.
According to the National Bureau of Economic Research (NBER), a recession is a significant decline in economic activity that lasts more than a few months and is spread across the economy, which includes factors like consumer spending and employment.
While U.S. Gross Domestic Product (GDP) declined for two consecutive quarters in the first half of 2022, it increased at an annual rate of 2.6% in the third quarter. Inflation is also increasing, reaching its highest level in 40 years at 8.2%, leading more economists to predict a recession.
Despite the potential challenges, recessions are a normal part of the business cycle. As you have likely lived through at least a few, such as the Great Recession from 2007 to 2009 or the shortest recession in U.S. history that occurred between February and April 2020 due to the COVID-19 pandemic, you may already have some experience with navigating these situations.
By knowing how to prepare, you can aim to remain financially stable or even take advantage of unique opportunities to build wealth.
To emerge from a recession in a stronger financial position than before, there are three key steps you can take.
1. Reassess your expenses and increase your savings
This involves analyzing your spending habits and creating a plan to save more, including building up an emergency fund to prepare for unexpected expenses or a reduction in income. Consider finding a second source of income, such as a part-time job or side hustle, to further bolster your financial security.
2. Invest in assets that increase in value over time
Such as stocks or real estate, with a long-term outlook. During recessions, these assets can often be purchased at a discounted price. Dollar-cost averaging, or investing progressively instead of all at once, is a valuable strategy during challenging economic times. Real estate properties purchased during a recession can provide cash flow and opportunities for wealth building through appreciation over time.
3. Diversify your investments to minimize risk.
Index funds are a great place for beginners to start, providing diversification and passive management. Purchasing low-cost, well-diversified index funds from brokerage firms like Fidelity or Vanguard can offer exposure to the entire market rather than attempting to pick individual winners.
By taking these steps and investing for the long-term, you can position yourself to build long-term wealth and emerge from a recession in a stronger financial position.
To emerge from the next recession in a stronger financial position, examine your finances closely, boost your earnings and emergency funds, and commit to steady and gradual investment. Following these steps could result in improved financial stability.