5 Things You Should Not Do During a Recession With Your Money
There’s a lot of talk these days about recession. And while no one knows for sure whether the country will go into a recession — an official recession isn’t identified until it is already underway — there are some things you want to be wary of in times of economic uncertainty. For one, avoid taking on new debt if you can help it, including cosigning on a loan with someone else.
Learn: 3 Ways to Recession Proof Your Retirement
Here are five things you shouldn’t do if you’re concerned about a recession.
What Is a Recession?
The first thing to understand is what a recession is and what causes it. The common definition of a recession is when GDP falls for two consecutive quarters. But that’s not the official definition. That definition, provided by the National Bureau of Economic Research Business Cycle Dating Committee, is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
When economists try to identify a recession, they look at the labor market, spending by consumers and businesses, incomes and industrial production. There are no exact metrics that will identify a recession, but these are the factors that are considered.
What Should You Not Do in a Recession?
Whether we’re in a recession or at risk of going into one, changing economic times often merit a close look at your current and future plans.
Don’t Ignore Your Interest Rates
Rising interest rates often come along with a recession, so be careful about your debt. If you have debt, including credit cards, an auto loan or a mortgage, make sure you are making your payment on time, every time. As rates rise, companies that can raise your rate due to a late payment will jump at the opportunity to do so.
Try to pay down any adjustable-rate debt that you have. Credit cards are usually the biggest culprit here, so put any discretionary funds you have toward paying down credit card debt if you have it. If you have an adjustable-rate mortgage or home equity line, that should be next on your list of things to pay down.
Don’t Take on New Debt
Don’t take on any new debt in times of economic uncertainty. In particular, don’t take on any adjustable-rate debt. If you have to take out a new loan or mortgage, make sure it’s a fixed rate. And pay attention to where interest rates are going so you can refinance if rates drop again. If you absolutely must open a new credit card, look for one with an introductory offer of 0% APR for the first several months.
This advice about not taking on new debt includes cosigning for a child or someone else. If you cosign a mortgage or other loan, you are on the hook for that debt just as much as the person who took out the loan. If they can’t pay, the lender will come looking for you, at whatever interest rate was agreed to when the loan was written.
Don’t Slack Off at Work
Recessions hit businesses as well as consumers, and they often have to cut costs. Layoffs are common during recessions, so make sure you’re not the first person the boss thinks of when they need to let someone go. Going the extra mile for the company will increase your value and, hopefully, reduce the chances you’ll get laid off.
Keeping your current job is the best-case scenario, but you should also be prepared for the worst. Keep your résumé — and your network — up to date in case you are downsized. That way, you’ll be ready to jump on any new opportunities that may come up.
Don’t Chase the Next Big Investment Opportunity
Now is not the time to take on more risk in your investment portfolio. Make sure you’re adequately diversified so that you don’t have an outsized stake in any particular company or industry, and consider moving some money from riskier investments into more conservative plays.
Beware of investments that seem too good to be true. They usually are — even more so during uncertain economic times. Desperate people will do desperate things to make a buck, even if it means taking advantage of others. Do your homework on any investment opportunities that may come your way to make sure they’re legitimate.
Don’t Forget About Cash
Over the last several years, cash has been the poor stepchild when it comes to investment returns. But with interest rates rising, cash is becoming more attractive, and banks are competing with one another to get their share of this flight to safety. Moving some money into cash can not only protect you from negative market returns, which are common in a recession, it can also help you take advantage of rising rates.
Plus, if you do find yourself the victim of a layoff, you’ll have a cash cushion to help you until you can find another job.
Where To Keep Your Cash
Shop around for the best interest rate you can find, which could be a high-yield savings account or a money market account at an online bank.
Certificates of deposit, or CDs, are also good options, but you need to specify the length of time you’ll leave the money at the bank. If that’s not appealing to you, look for a no-penalty CD, which will let you withdraw your money before the end of the term without paying a penalty to do so.
Recessions, while never pleasant, are a predictable part of the economic cycle. Making good decisions with your money during times of recession or economic uncertainty will help you weather the storm and be prepared for better economic times ahead.
FAQIt's normal to be anxious about the possibility of a recession. Here are the answers to some common questions to help you be prepared.
- What is best to own during a recession?
- Look into stocks in staple companies, like food, toiletries and healthcare – things that people need to buy even in difficult economic times.
- Is it good to hold cash during a recession?
- Yes, it is a good idea to have a little extra cash stashed in a high-yield account during a recession. This can ease the impact of serious downturns in the market on your finances and keep your funds liquid for when you need them.
- What are three things that are happening during a recession?
- During a recession, a few things tend to happen: unemployment rises as employers lay off workers, manufacturing and production levels decrease, and cost of living increases.
- What is the best thing to do with your money in a recession?
- During a recession, be vigilant about keeping track of your finances – invest in staple stocks and relatively safe investments like bonds, pay attention to your interest rates and try to keep some cash in an emergency fund in case things get rough.
- It's also a good idea to go over your budget and decrease your discretionary spending. The more savings you can set aside, the better prepared you'll be.
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- Forbes Advisor. 2022. "What Happens During A Recession?"
- The White House. 2022. "How Do Economists Determine Whether the Economy Is in a Recession?"