Preparing Your Finances For The Next Recession
The economy has been running white hot for so long that it can be easy to take strong economic conditions for granted. Favorable economic conditions have afforded us a number of financial advantages over the past few years.
- Low unemployment has made it easier to find a new (potentially better) job or ask for a pay raise from our current employer
- The stock market has been providing historic returns
- Home values have increased dramatically, increasing the personal wealth of millions of homeowners
- Interest rates have been at historic lows making it easier to manage debt
- Even though all this growth, inflation has remained relatively low
There are growing signs that the good times and easy money might be coming to halt. Interest rates have been rising at a faster rate than expected, and all signs point to continued increases in the near future.
What Rising Interest Rates Mean For The Economy
The primary reason interest rates are rising is that the economy is running “hot” which means inflation could be on the rise. To combat inflation, central banks increase interest rates, which reduces the level of investment and consumption throughout the economy. This could mean we are at the peak of the business cycle and could be entering a period of slower growth or a recession.
What Rising Interest Rates Mean For You
First of all, if you have any money invested in the stock market you may have noticed the past several months have been a roller coaster. The stock market likes low-interest rates.
- Low-interest rates make it easier both corporations to borrow money and invest in expanding their business.
- Low-interest rates also make it easier for people to borrow money and invest in the stock market.
So when interest rates rise the stock market gets worried and things begin to get volatile.
Second, rising interest rates make it more expensive to afford a mortgage. Higher mortgage rates paired with historically high housing prices is keeping many renters from achieving their dream of owning their own home. There is growing evidence that suggests home prices will begin to fall. If you are a homeowner, falling home prices will negatively impact your net worth.
Housing is a major driver of economic growth and a slowing housing market could be an indicator that recession is right around the corner.
What Typically Happens During A Recession?
- Unemployment rate goes up
- Wages stagnate
- Home prices fall
- The Stock Market Falls
- Add on top of that, interest rates have been rising which means it will be more difficult to manage debt
So basically, all of the factors that have been working in our favor the past few years could reverse course and work against us.
Preparing Your Finances For A Recession
For most of us, the number one driver of our wealth s is not our house or the stock market it is our job. Rising interest rates and lower stock values can present short-term pain but losing your paycheck could be catastrophic.
Don’t take your job or your job security for granted. Make sure you are firing on all cylinders at work. Do everything you can to add value to your organization. We don’t get paid for time, we get paid for adding value. The first people who will be laid off during a recession are the people who are perceived to add the least value.
The next thing that has the potential to crater your finances is your debt. With rising interest rates it’s critically important to begin tackling your debt. Starting with high-interest debt like credit cards or payday loans, treat debt like your worst enemy, because it is.
Last week, I wrote about three shocking facts as it relates to credit card debt in America. The three headline facts…medium.com
If you can avoid it, do not lock in your losses. Home and stock prices fall during a recession, that is perfectly normal especially when they are starting at historically high prices. It’s important to remember that these are only paper losses. Meaning your wealth, “on paper” has fallen, but it will rise again when home and stock prices recover. If you sell your house or stocks when prices drop you move from “paper losses” to “real losses”.
The people who got hurt the most during the financial crisis are the ones who sold when the market was at the bottom. Try your best to manage the fear and stay the course. If your financial circumstances for you to sell that’s one thing, but don’t make a panic decision and sell at the bottom. When Sh*t is hitting the fan, don’t watch the news or check your stock balances, it will only feed the fear.
Finally, try and stash away some cash in an emergency fund. It never hurts to have extra cash on hand in case of emergency.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.