Recessions are generally categorized by a rise in unemployment, which means subsequently there are fewer jobs available to support the economy. Recessions are also categorized by lower wage earnings, which means people spend less and businesses grow much slower. These factors combine also mean that generally assets and stocks decline in value.
Knowing if we're headed for a recession is difficult to forecast. There are an incredible amount of variables which need to be considered to truly indicate and accurately predict recessions. Largely, this means that there is not full consensus on if we're headed for a recession or not and if realized, how severe that recession would be.
Recessions are a normal part of economic development. "Since World War II, we've experienced a recession about every five years, with an average length of just under a year". (Schwab) However, even recessions classified as mild or moderate can hurt, if your financial situation isn't properly aligned.
The following information provides insight into the things you can do to ensure you are positively position to reduce the burden and undue financial strain from a recession.
Establish an Emergency Fund and Make Sure It's Properly Funded
Recessions mean unemployment rates are high. This means that your need to plan to weather any event which could create income disruption. It's generally recommended to save a minimum of 3-6 months of your pre-tax income. If you don't have an emergency fund established and if it currently doesn't hold the recommended amount, automation is your friend. Set up automatic transfers scheduled to move money into your emergency fund for an effortless but critical move to insulate you and your family financially.
Eliminate High-Interest Debt
High interest debt is usually any type of debt with an interest rate above 6-8%. This tends to include credit card debt and other personal loans. Whether we're in a recession or not, paying off high-interest debt should be one of your primary focuses to build wealth and insulate your financial position.
If you're interested in the most strategic way to pay off your debt, BTI offers debt reduction analysis. Find out how you can reduce your debt, in a shorter amount of time saving thousands in interest! Learn more and schedule a free, results guaranteed conversation with a BTI analyst to learn more.
Delay Expensive Purchases
If you have concerns about job security, wage loss, or changes in your income, step back and reconsider big purchases. Determine whether you truly need what you're considering purchasing right now, or whether it can wait several months. In most situations, big purchase decisions can be delayed or you can find 'work arounds' in the interim to accommodate.
Track Your Expenses
Spending money. We don't all hit the mark quite like we feel we should and there is normally always areas for improvement. Learning how to save money, become frugal, and develop a mindset of social indifference, takes time. Being disciplined financially needs to become part of your DNA.
By tracking your monthly expenses you're able to see areas for improvement in your spending and also create a mindset where you're continually reviewing your spending patterns. It increases awareness. By tracking your expenses you're also able to see whether there are things you are spending your money on, which have grown to be exponentially more expenses allowing you to make changes as needed should you want to consider an alternative.
Business owners, if you're not tracking your expenses, make a plan to start doing so immediately. Supply chain demands during recessions create variability in pricing and as an item goes up in price, your profit goes down. Watch your expenses, like you'd watch your child at a pool. If you don't have an organizational mechanism inplace to track your expenses, BTI provides these services as well.
Don't Touch Your Investments
During recessions stock values plummet. People lose hundreds of thousand of dollars. But, there has NEVER BEEN A TIME IN HISTORY WHERE THE MARKET DID NOT RECOVER FROM A RECESSION!
Experts agree your smartest and most reliable mechanism to protect your finances and grow your wealth is that even during period of economic downturn, stay the course.
Research has proven, that passive investment styles outperform those of individuals who are actively moving and shifting their money frequently. You can't predict the market. Statistical forecasting models struggle to predict the market. Stop trying to shift your money to the things your great uncle twice removed told you were going to be the next Microsoft.
Sit tight, lay low, don't touch solid investments (unless absolutely necessary), and wait for the market to recover. Most markets recover within two years or less after a recession and you'll be pleased you didn't touch your money.
Where Do I Start?
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