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- I’m a financial planner and I have four recommendations for recession proofing your finances.
- Start by increasing your income: ask for a 7-10% raise or find a side job to earn extra money.
- Also: Put your money in a high-yield savings account – you can earn around 3% interest right now.
“How do we even know we’re in a recession? Do they announce it, for example?” My friend and I laughed at her question.
If you’ve read the news, it looks like we’ve been heading into a recession for months now and we’re all eagerly awaiting the official news.
The official definition of a recession is a period of economic decline where GDP (gross domestic product, or whatever we make and sell over a period of time) declines for two consecutive quarters. This means that a recession cannot be officially declared until six months after it begins to occur.
I started in financial services in March 2008 at the age of 22, a few weeks after the collapse of the large investment bank Bear Stearns. In March 2009, the stock market had officially lost 40% of its value.
The Great Recession technically lasted from December 2007 to June 2009 and since then the stock market has only gone up and so has GDP.
We have just experienced the longest bull market in economic history, with the stock market rising in value for 11 consecutive years. Most bull markets last an average of five to seven years. This means that for the entire adult life of my generation, we have only seen the stock market grow.
Despite more than a decade of stock market prosperity, the negative effects of the Great Recession have been long-lasting, especially for communities of color. A 2015 ACLU report found that by 2031, the average wealth of black families will be nearly $100,000 lower than it would be had the Great Recession not occurred.
A looming recession can feel overwhelming and make your finances feel like they are out of control. While there’s no way to predict how the recession will affect your finances, there are things we can control. Below are four ideas to start now to protect your finances against the recession.
1. Find ways to increase your income
Diversifying your sources of income or increasing the income you already have is the first place to start strategizing.
If you are able to ask for a higher raise to keep up with inflation, consider asking for at least a 7-10% raise at your job.
If not, now is the time to think about adding an additional stream of income, whether it’s getting a second temp job, finally putting a product on Etsy, or monetizing a set of skills in a service.
2. Consolidate your debt into fixed rate loans
If any of your debt has variable interest rates, consider moving that debt into a fixed interest rate loan so your interest rate doesn’t change.
For example, if you have credit card debt, chances are interest rates have gone up. Consider taking out a personal loan to pay off credit cards if the interest rate on the loan is fixed and equal to or lower than the credit card debt.
Just make sure you can still afford the monthly payment – personal loans require you to pay back principal and interest, which is ultimately a good thing, but it can increase your monthly bill.
3. Decide which “wants” are non-negotiable, even in difficult times
I have had clients who have lost their jobs and confessed to spending more money that month than when they were employed. It’s not an anomaly, it’s a natural human reaction to feeling like everything is screwed up, so why not have a lobster with your steak.
Purchases that you have been told are frivolous are most likely purchases that replenish your willpower and make you feel like yourself.
Instead of trying to cut these purchases out of your budget, give yourself permission to include them! When you allow yourself to expect to buy a cup of coffee or buy shoes here and there, you can really enjoy it and allow it to bring you to life.
4. Move your money to a high-yield savings account
While we are seeing interest rates rise on mortgages, auto loans and credit cards, we are also seeing interest rates rise on high yield savings accounts, with some banks paying interest from 3% or more. If you haven’t started saving in a High Yield Savings Account, now is the time.
When putting your money into high-yield savings, also consider increasing the amount of your savings by 10%. For example, if you save $100 per month, save $110 per month. If you don’t save regularly, choose an amount to automatically transfer to your savings.
Get through this together
There’s understandably a lot of fear and uncertainty right now when it comes to your finances, which means it’s even more important to focus on the things we can control. It’s also an important time to start practicing group healing, as some of us will get through this recession easier than others.
If you can, add a line item to your time or money budget to help out or give directly to friends in need. If you’re struggling, find ways to ask friends and the wider community for help.
Although we cannot individually prevent a recession from happening, we can ensure that we all get through it together.
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