With expectations for a recession already in the forecast for 2023, the recent failures of Silicon Valley Bank and Signature Bank have further stoked fears that an economic downturn could be on the horizon.
But it remains to be seen when a recession will happen, if at all.
Yet 41% of Americans have taken steps to prepare for a possible economic downturn, according to a survey by Morning Consult. That survey of over 2000 adults, was taken in February, well before the recent banking troubles set in.
Now, all eyes are on the U.S. Federal Reserve, which will decide whether to continue to raise interest rates when it meets next week, or press pause on its inflation-fighting strategy as it watches the banking sector.
If there is a further increase, it could impact several aspects of personal finances such as the interest rates for loans including credit cards, car loans, and mortgages, as well as the return on savings from bank deposits.
According to Morning Consult, individuals who are preparing for a potential economic downturn are mainly taking two steps. 44% of respondents reported saving more money or building an emergency fund while 39% said they are cutting back on spending or spending more strategically. Some individuals, about 11%, are even stockpiling goods or food.
The recent collapse of banks has caused clients to express more urgent concerns. Many people are still haunted by the memories of the 2008 global financial crisis, which explains their anxiety. However, the current economic figures, including recent stock performance, are more positive than they were during the 2008 crisis.
Still, there are a few steps you should take now to make sure you are prepared to weather a downturn.
1. Stress-test your finances
The impact of a recession on an individual’s financial stability depends heavily on their employment status. If someone is fortunate enough to still have a job during a recession, they may still experience a reduction in their earnings. Therefore, it’s important to assess how one would cope with a decrease in income. To do this, one should evaluate their current financial obligations and stress-test their income against them. Having a safety net in place, such as an emergency fund, can also help mitigate the impact of a recession.
Despite the fact that the U.S. economy is currently strong, recent banking issues have raised concerns about potential consequences for employment. In such an uncertain climate, it’s important to be proactive about preparing for a potential recession. This may involve taking steps such as reducing expenses, increasing savings, and diversifying income sources. By taking a cautious approach and planning ahead, individuals can better protect themselves against the potential negative effects of a recession.
2. Save more cash
It is important to prioritize building up your emergency fund in light of recent bank collapses. This will ensure that in the event of a job loss, you have enough money to support yourself for a certain period of time without having to sell any assets at a lower price.
However, it may be more challenging to come up with additional cash due to the ongoing issue of high inflation. Nonetheless, it is still advisable to try to increase your emergency fund.
3. Reduce your debts
Rising interest rates can lead to an increase in consumer debt because borrowing money becomes more expensive. Credit card interest rates have climbed to an average of 20%, with some companies charging as much as 30%.
To manage the impact of high-interest rates, experts suggest that consumers struggling to pay off high balances should consider renegotiating their debt payments. Alternatively, paying off or reducing those debts can provide greater financial flexibility.
Students with federal loans should prepare to resume payments, as pandemic relief policies that suspended payments on federal loans will likely end soon. While paying off those balances directly may not be the best option, putting the money that would have been used to pay off debt into a savings account can yield as much as 5% interest. Once payments resume, the funds can be transferred to pay off the student loan.