There are many things in life worth being prepared for, as the Boy Scout motto goes, and a recession is one of them.
Rumors of a recession or a consequent drop in economic activity have been circulating for months. Michael Hicks, director of the Center for Business and Economic Research at Ball State University in Muncie, said in his forecast that the probability of a recession in the new year is substantial at about 50/50.
Even if the last November jobs report was strong and the economy manages to recover from high inflation, the US could see a recession sometime in 2023. Additionally, Hicks said, even if there isn’t a recession next year, it could be because the Federal Reserve is raising interest rates to fight inflation, also known as interest rate tightening.
“There are many job opportunities,” Hicks said. “There is a lot of demand for goods, but there are some short-term tensions surrounding the US Federal Reserve’s rate hike.”
The prospect of an economic recession sends chills down the spine of many. But thankfully, there are ways to prepare for an economic downturn not being that bad.
Even if the economy avoids a recession in 2023, there are steps you can take to ensure financial stability no matter the economic twists.
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liquidity flexibility
In the short term, Gregory Renn, finance expert and professor of practice at Indiana University Bloomington, said to live within your means, avoid debt, and save wherever possible. Liquidity flexibility is essential because it means you can access funds faster for essentials when the economy takes a downturn.
Renn recommends living within your means and making sure that fixed expenses, like rent and car payments, account for no more than a third of your monthly after-tax income.
“If it’s above that and something goes wrong because of the recession, you won’t have that flexibility and the recession will stress you out,” Renn said. “But if you’re lower, then pave the way for writing a recession with little impact on your lifestyle.”
reduce debt
Start paying off credit card balances first, then work on making other non-mortgage payments. Your mortgage should be the last thing you pay off, as Renn says you can still get a tax break on interest paid on a mortgage.
If you have a lot of debt that you can’t pay back, consolidation is also an option. However, this can affect your credit score, so the step should be taken sparingly.
“That should be a parachute option rather than a first choice because there are some costs,” Renn said.
Create an emergency fund
This should amount to three to six months of all expenses – three if you have two sources of income, six if you have one. Ultimately, the goal is to build up to 12 months that would cover costs, Renn said.
Every little thing that can be spirited away helps, even if it’s just a few dollars. This way you can weather the storm when something urgent like a car repair comes up at a time when money is tight or you are unemployed.
“That’s going to allow you to do that repair and get your job and do all the things that you live your life without interruption,” he said.
Additionally, a recession is a time to defer big purchases that could hurt savings or cash flow, Renn said.
“Lower your expectations of what you can buy,” he said. “So try to delay big purchases during the recession or what kind of returns you can get on your investments during a recession.”
Rely on the community
In difficult times it is important to have people by your side that you can rely on. But during a recession, that support can sometimes be financial, in addition to the love and care of family and friends.
“You know where to turn to for help yourself during a recession if you need it, whether it’s financial or emotional,” Renn said.
When it comes to thinking about your next job, Renn says networking is key.
“Think about who you know and who you might know at work — your friends, your family who could help you get back on your feet if needed,” Renn said.
long-term goals
Recessions are difficult times. But for those lucky enough to be prepared, it can be a time to make big financial decisions, experts say.
“There can be some chances, but you have to be able to take them,” said Renn.
During a recession, real estate prices generally fall. With mortgage rates at their highest in years, this could bode well for those looking to buy a home. Hicks recommends saving now in case interest rates fall, which will soon make homeownership an affordable option for people.
A recession would also mean price cuts and an end to the historic inflation that has been squeezing American households for months.
If you’re able to, Hicks said, recessions are a good time to consider going back to school.
“Investing in yourself during a recession is a really good time to do it,” he said. “Because the benefits of staying in the labor force are so much reduced at a time when wages aren’t high and there aren’t as many good job opportunities.”
However, Renn said, acquiring additional education shouldn’t come at the expense of your financial prosperity. If you’re happy in your current job and like your boss, it may not be time to take on additional debt.
resources during a recession
When money is tight during times of economic downturn and recession, community organizations can provide support.
Fred Glass, Gleaners President and CEO, said that at the Gleaners pantries in Indianapolis and across the state, there is an increasing financial need among the Hoosiers.
“When we, pantries and food banks, are a canary in the coal mine, we cough quite hard because we see the impact unfavorable economic conditions are having on the people we serve,” Glass told IndyStar.
Demand for food and resources from gleaners has increased 50% since early 2022, Glass said, and is nearing peak demand levels of a pandemic. In one week in early December, Gleaners’ drive-thru pantry in Indianapolis served 811 families. That poses a problem as the bank is scheduled to receive less surplus protein from the federal government this year — around £10m, compared to £20m in 2021.
While Glass can’t pinpoint a specific reason for this increased demand, he said inflation and rent increases are weighing on families as unemployment is low.
“Our people really feel the need and are being forced to make a decision: ‘Do I turn on the lights? Or am I eating?’” he said.
Glass said people shouldn’t be shy about coming to Gleaners for a meal, even if they’ve never asked for help at a pantry or bank before.
“These are working people, often older people, often single parents … and new people who are looking for these services that they haven’t used before,” he said. “That’s just a fact.”
Recessions are inherently characterized by increased job losses, which means Hoosiers may be able to apply for unemployment insurance online at the Department of Workforce Development’s website: www.in.gov/dwd/indiana-unemployment/file/.
Related:Here is a step-by-step guide on how to apply for Indiana unemployment benefits online
The final result
If you can afford to keep your job now, Renn advised stay and embrace the stability.
“Usually the first jobs are the lowest paying jobs or the first jobs that come out during a recession,” Renn said. “So if you can control any of this, control it now and wait.”
While recessions can be difficult to weather, they are also a normal part of the economy’s life cycle.
“Remember, recessions are normal,” Renn said. “It’s not great, but there are opportunities for those who are prepared.”
All things considered, Hicks said, the person truly prepared for a recession is already looking to the future.
“Use this recession as an opportunity to prepare for the next one because it’s inevitable,” he said.
Reach out to IndyStar business reporter Claire Raffford at [email protected] or on Twitter @claireraford.
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