Time To Hunker Down: Prepare For a Possible Recession
Outside of the world of economists, the majority of people out there could not state the technical definition of an economic recession. Just for fun, it’s defined by the federal government as, “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.”
OK – that’s somewhat helpful, but it does nothing to tell us when we are in a recession or, more importantly, when we’re at risk for falling into one. The point of this article isn’t to explain the largely unexplainable, for if generations of economic theorists still can’t explain what a recession is without leaving a roomful of blank stares behind, we’re not going to try to do so either. That’s really not the point of all of this.
What is the point is that when a recession hits, people from all walks of life are going to struggle mightily with everyday expenses and debt, among other things. Based on what we’re hearing and reading now, it seems possible if not likely that another recession is in the offing. I find it useful to think in terms of analogies, and with regards to a recession, you may find it helpful to think of it as a big storm hitting your home. Unfortunately, this storm lasts much longer than hours or days – it can last months or in some cases even years.
So what should we do? How do we prepare for this oncoming storm? Is there any way to avoid the grips of a recession that, if it’s like others in the past, will leave millions of families dealing with ruined finances behind? While there’s no way for someone to completely avoid the effects of a recession, there are things that can be done to mitigate it. Keep reading below for some ideas to consider that may help you weather the storm.
1. Give Yourself a Thorough Financial Assessment
Most people consider themselves to be financially responsible. We all at least have a general idea of what we should be spending money on and what we shouldn’t. We all understand at least conceptually that we need to be putting even a few dollars here and there away for that rainy day that we know is coming. We’ve all heard and read the guidelines for financial stability, and it’s hard to disagree with them.
Then that thing known as real life gets involved. We are busy, we don’t have time to examine every penny and unexpected things happen like illnesses or automobile breakdowns or whatever else that hits us like a ton of bricks in the night. As a result, too many of us do not look closely enough at our ongoing financial norms and patterns.
It’s time to take a day to do that. If you do, it’s likely you’ll realize that no, you don’t need to eat out as a family two or three times per week. It’s also quite possible that you’ll find at least one or two monthly charges for a gym or a sports app that you never use but that you’re still paying for. Cut down on those restaurant bills. Cancel those unused memberships. Trim the proverbial fat.
As for what to do with the money you save as a result? We’ll get to that in a bit.
2. Deal With Your Variable Interest Debt
Given that interest rates are rising in the current economic environment, it’s unlikely that you’ll be able to do much with your debt that carries fixed interest rates such as your mortgage or car payments. Those are locked in, and if you secured those loans before rates started to rise, the last thing you’d want to do now is mess with them anyway.
However, when interest rates rise, that also means that the interest rates on debt with variable rates, such as variable rate mortgages or, most commonly, credit cards, are also going to rise. That could prove to be a problem for a lot of people who are already working tirelessly just to manage the debt they are already carrying. Adding a few hundred dollars in payments every month because of a spike in interest rates could prove to be untenable for most people.
How do you handle that? The best way to handle it is to pay down as much of that debt as possible, but obviously that’s easier said than done in many situations. Instead, a more realistic option when it comes to something like a variable-rate mortgage is to lock in a fixed rate, even if it’s higher than you want. At least it’ll provide you with some cost certainty and peace of mind that you’re not going to be paying more. You can always look to refinance when the storm… er… recession, is behind us.
With regards to credit card debt, you likely do have options available. Again, if paying that debt down is not possible, look around for new card or even look at other existing credit card accounts that you have. Some of them may offer a balance transfer promotion whereby you move your debt to that card and then enjoy a low rate for a period of time. That could help you at least for the time being, as avoiding an extra 10 or 15 percent in interest payments for 6 – 12 months could amount to significant savings.
3. About Those Cost Savings…
Remember above when we alluded to what you should do with those cost savings? You should do exactly that – save every penny possible. Most experts state that you should have at least two if not three months of general overhead in the bank to help you through those dark times, such as during a recession.
Assuming you have your finances organized and your debts in order in terms of what you’re paying every month, you’ll open up a whole new set of options for yourself and your family. If a recession arrives, the best option may be to just hunker down and wait things out until economic conditions improve. If you come through unscathed, it could give you an advantageous launching pad to move forward when the proverbial storm is over.
Ultimately, every financial situation can be dealt with such that those who are struggling can regain control of their finances and, just as importantly, their peace of mind. If you’re looking to do just that, let Wade Torkelson help you deal with your debt so you can become proactive financially instead of reactive.
Wouldn’t that be nice?
