Are your finances prepared for a recession?

There is a saying that goes “better safe than sorry”. Recently a Bloomberg article surveyed various economists about the possibility of a recession by 2023 and 30% of those consulted see it as a certain possibility.

Taking into account that the last recession in the USA was caused by the COVID-19 pandemic, it was so sudden that no one could prepare.

In this publication we want to give you the main tips so that you are prepared in case a recession were to come.

But first of all let’s review what “a recession” means:

Investopedia: Defines it as the significant drop in the general level of the economy for two consecutive quarters together with the growth in the number of unemployed.

Let’s start with the measures you should apply to prevent being a victim of a possible recession:

1) You must lower the balance of credit cards and personal loans:

This task is not easy at all, credit card companies are specialists in continuously tempting you to use them more every day.

It is a powerful industry where they put all their resources and the intellect of the best experts to achieve it, and it is not a very fair battle.

On the other hand, the United States is experiencing the highest inflation of the last 40 years.

Which causes families to resort to their credit cards to cover part of the consumption and we see that the general levels of debt are growing rapidly.

Added to this explosive mix is the factor of rising interest rates, this being one of the remedies that the Federal Reserve (Central Bank of the United States) must apply to lower inflation.

But, where exactly everything becomes more complex by:
• The economy is made up of many variables and if the interest rate rises too much, it can make the economy stop growing instead of slowing down to attack inflation and that is where the specter of recession appears.
• By raising interest rates, the amount you will pay in monthly installments for your card begins to rise rapidly and instead of being a help to be able to face those expenses that you cannot cover, it becomes a weight so strong that more it may well sink your family finances.
So of all the points that we are sharing with you, this would be one of the most important.

Our suggestion would be that you start with the cards that have the least debt to gradually achieve a sense of achievement and then go on to the next one.

Starting with the one with the highest rate makes the most sense financially.
But we give this suggestion because, as they say, Personal Finance is more about personnel than finance.

2) Now yes, please build a substantial emergency fund:

If we had to summarize one of the great lessons learned from the pandemic, there is no doubt that those who managed to get through the storm we experienced better were those who had an amount saved than those who had no savings.

We have always said that you must have at least the equivalent of three months of your monthly spending in a bank account, this amount can vary depending on the situation of each person or family, being the equivalent of 6 months one of the most common parameters that planners financial we suggest.

Now, a simple rule to calculate what the size of your savings or reserve fund should be is to ask yourself the following question:

If tomorrow you lost your job, how long do you think it would take you to get a job similar to the one you have now in terms of income?

And it is there where each of you will be able to think how long it would take you to get another source of income and that scenario should be equal to the minimum number of months that you require of your monthly expense.

By having this number you have to calculate what your basic monthly expenses are and that amount is what you should have in the bank, if it is read correctly in the bank and not invested.

Since, although it is true, it will be exposed to inflation, you would not want it to be invested and the markets go down and you just need it.
So you should see it as if you were paying an insurance policy for your peace of mind and family financial protection.

3) If you were thinking of making a big purchase…

Everywhere we see that the price of real estate is at its historical maximum, new cars are expensive and even used cars too.

So, you must analyze well, if it is the right time to acquire a large debt, to make a purchase like these, where you will usually also use an important part of your savings, which could leave you much more vulnerable in the future.

So, before taking such an important step, you should make a diagnosis of your personal finances, to determine where you should gather information for each of the following dimensions:

• Validate how your income is versus your expenses and if you have savings capacity.
• Add up all your debts and see how your credit index or Credit Score is.
• Check if the coverage of your insurance policies are adequate.
• You must know how likely it is that a recession affects your work and you can be fired.

If some of these answers are negative, be careful because perhaps it is better for you to wait.

4) Panic is not a good adviser for your investments

Recessions are totally natural processes, an economist describes them as those great fires that occur from time to time in nature.

Where they rather give way to the growth of new vegetation and where those who are not prepared will be the ones who will suffer the most.

Particularly in this case, many economists are predicting that this is not going to be a recession as strong as the others since we must take into account the following factors:
• Unemployment has returned to its levels before the pandemic, this being one of the lowest figures in the last 50 years
• More than 5 billion dollars entered the economy as an aid program and those are still there in the financial stream
• There are more than 11 million job vacancies waiting to be filled, while the total number of unemployed is 5.9 million
With that said, you should be prepared to know that the stock markets are always trying to predict what might happen in the economy.

They are not guided by what has already happened but by what will come.

It is there where, according to a study carried out by Darrow Wealth Management, it reminds us that traditionally the months before a recession, the markets are impacted by it.

But it also shows us that on average after recessions a large percentage benefit from the growth of their values. (Note: Historical returns are not a guarantee of future returns.)

As an investor you should always remember that the stock markets are for the long term.

So your financial decisions should not be influenced by short-term decisions that appear in the news.

Rather, seek to have a widely diversified and low-cost portfolio in order to lower your risk in case a particular sector of the economy or a specific company takes longer to recover or perhaps goes bankrupt.

These issues can be complex and as always it is important to consult a certified financial planner you trust who can help you.