Is the United States heading toward a recession?
Amid a high inflation period, many Americans are concerned about the risk and what this might mean for their personal finances. Fortunately, there are certain steps everyone can take now that will enable them to better navigate an uncertain time.
Establish an Emergency Fund
If you have not already created an emergency fund, now is the time to start building one. An emergency fund works to help you weather the storm in the event of sudden job loss or an unforeseen major expense without resorting to liquidating retirement assets or relying on loans or high-interest credit cards.
Adam Deady, CFP and investment analyst consultant with MassMutual, said a general rule of thumb is to save at least three to six months of living expenses in a risk-free, liquid investment vehicle you can easily access. Investment recommendations include a money market account or a high-yield savings account.
Start Eliminating Unnecessary Expenses
You don’t have to wait until a recession hits to eliminate unnecessary expenses from your budget.
Deady recommends using this time to carefully review your spending habits. Then, cut back on any nonessential spending — e.g., cancel rarely used subscription services or do maintenance on your own at home instead of hiring help. You can put the money saved into your emergency fund or an investment or retirement account.
If you’re struggling to determine how much you should be saving, Brittney Castro, financial expert and Mint’s in-house CFP, recommends thinking of saving as a fixed expense and factor it into your budget.
“The 50/30/20 rule can help you estimate how much you should be saving — 50% on needs, like food or rent, 30% on nonessentials and 20% on savings,” Castro said. “The most important thing is remembering to live within your means. You never want to end up in a situation where you’re stretched too thin with your finances.”
Pay Down Debt
“Paying off high-interest debt, like credit cards or student loans, should be a priority when the economy is strong,” Deady said.
If you have any high-interest debt, work to pay it off. Deady said this will make it much easier to pay your expenses if your income is decreased for any reason or period of time.
Put Money Into Savings
Angela Holliday, president of Frost Brokerage Services, Inc. and Frost Investment Services, LLC, said rate hikes go both ways. This means they’ll go up on savings accounts and certificates of deposit (CDs).
“Put more in those accounts now, and you’ll get more momentum on what you’re saving,” Holliday said.
Maximize Your Social Security Benefits
How can you offset inflation and potentially prepare for a recession with your traditional retirement benefits, like Social Security? Brian Colvert, CFP and CEO of Bonfire Financial, said you can work to maximize your Social Security benefits by delaying them.
“Delayed Retirement Credits help you to increase your benefit by a certain percentage each month that you delay starting your benefits,” Colvert said. “If you can wait to start getting your Social Security checks until age 70, your monthly payments will be higher and will adjust to the annual cost of living when you do begin to take them.”
Delaying Social Security, Colvert said, is a small step that can potentially hedge off some inflation and help your retirement savings go a little further in the event of a recession.
Watch Rates and the Fed
“Typically, the average consumer isn’t watching the Fed closely, but you might want to have some idea when rate increases are coming,” Holliday said.
Individuals planning to make big purchases such as houses or cars are strongly encouraged to watch the Fed to ensure they are able to lock in the best rates.
Diversify Digital Assets
One strategy that can potentially help recession-proof your finances is to consider diversifying with digital assets such as Bitcoin.
“Essentially, owning Bitcoin means you are betting against the world’s fiat currencies,” Colvert said. “Most major digital assets have a fixed number of coins or have capped the potential circulation growth.”
In 2021, billionaire investor Paul Tudor Jones claimed cryptocurrency protects better against inflation than gold. While there is still limited evidence that crypto can hedge inflation, Culvert said it’s worth looking into if it fits your risk tolerance and time horizons.
Consider Making a Job Move
The current job market is hot and, for many professionals, increasing wages is key to fighting inflation. “Now might be the right time to look for a new job or ask for a raise,” Holliday said.
Work With a Financial Advisor
If you have additional questions about building an investment strategy, investing in cryptocurrency or plans to make a big purchase such as a new home, work with a financial advisor to ensure you’re on the right track.
Understand That Inflation Impacts Everyone
Do not panic or imagine the worst-case scenario. Holliday said inflation impacts everyone, whether you’re a high-income or low-income earner. What matters now is that you use this time to prepare. Cut back on nonessential expenses, increase your savings and pay down or restructure high-interest debt.
Once you have a plan in place, stay the course.
“The key is to stick to the plan that protects your finances,” Deady said. “Deviations from your plan can derail the best of intentions.”
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