Where’s the economy heading? Wages have risen, but not enough to outpace inflation. In an effort to combat said inflation, the Fed has raised interest rates sharply and quickly. It seems there is no shortage of headlines about an inevitable recession. Contrast that with a drive around town or getting stuck for hours in weekend ski traffic, and there certainly seems to be a disconnect between what economists are telling us and what our eyes are telling us.
While the economy has basically been growing since 2009, economic expansions can’t go on forever. Just as night follows day, recessions follow expansions. However, like everything else throughout Covid, the next recession might look different than we imagine. I believe what we might experience is a “rolling recession,” a slowdown that rolls through different sectors of the economy consecutively.
A bright spot in the most recent jobs report is that the service sector showed a lot of strength. This is positive news because so much of our local economy is based upon services. Should a recession ripple through the economy, the service sector won’t be immune, and neither will our local economy, but maybe those impacts are further down the road. Taking advantage of our current economic environment and preparing to survive a recession could serve you well. Here are some steps that can be taken:
1. Know where you stand
Knowing where you financially stand today is step one. As the saying goes, knowledge is power. Have a good understanding of your cashflow, money coming in versus money going out.
For those outgoing expenses, know which are required and which are discretionary. Have an understanding of your personal balance sheet, what you own versus what you owe. These two pieces of information give you a sense of your financial health.
2. Pay down your debt
Now that you know where you stand, it’s critical that you pay down debt while the economy is still growing. Often, an economic downturn leads to job loss. If you were to lose your job, having the burden of debt just makes the situation worse. Begin by paying the smallest balance off first; this early win can help sustain that paydown momentum.
3. Downsize to a more frugal lifestyle
Downsizing and picking up a frugal lifestyle while times are good is great preparation for a recession. That way you won’t find yourself struggling to adapt to a less favorable situation when the recession hits and it’s a necessity.
Living within more frugal means is not as difficult as you may think. It is mostly about staying aware of your spending choices and making cuts on less necessary things, those discretionary expenses.
Take a close look at recurring subscriptions such as streaming services, for instance. Those tend to be on auto-pilot and can really add up.
4. Beef up your bank account
With your job and income in jeopardy during a recession, it is important to focus on your emergency fund. The general rule of thumb is 3 to 6 months’ worth of living expenses in savings. If you have less than that, it is time to begin saving towards that goal. A positive side effect of rising interest rates is that savers are finally earning something on their savings. A high yield savings account is paying approximately 3.5% in annual interest. Even better, buying short term U.S. Treasuries could yield nearly 5% in annual interest. Check out treasurydirect.gov for more details.
Should a recession ripple through the economy,
the service sector won’t be immune, and neither will our local economy.
5. Diversify your income
Relying solely on one source of income has inherent risk, because if the economy slows and you lose your job, you may also lose your only income.
But if you have a flexible schedule and have the time to spare, getting a second job can help your savings grow significantly. The Truckee Jobs Collective, a local job search website, boasts 485 local employers’ profiles, and job openings are posted almost every day.
6. Diversify your investments
In addition to diversifying your income sources, it is also a great idea to have various investments. Having a well-balanced portfolio could help mitigate the negative impacts a recession might have on your investments.
Go through your portfolio and make sure your investments are spread out across different types of assets. Another positive side effect of rising interest rates is that bond investments are paying decent earnings to investors.
Also, when a recession does strike and the Fed is forced to lower interest rates to stimulate the economy, those bonds could rise in value.
7. Continue your education and skill development
One of the best investments you can make is in yourself. With the unemployment rate rising during a recession, it is important to be able to find work, and the more skills you have, the better. Locally, Sierra College offers an expansive course list and various degrees and certification programs.
By taking small incremental steps today while times are good and the economy is not yet in recession, you can help to ensure that when the next recession does strike, you are well prepared.
This article is meant to be general in nature and should not be construed as investment or financial advice related to your personal situation. Please consult your financial advisor prior to making financial decisions.
~ John Manocchio (CA Insurance Lic#0H73423) is an investment adviser representative with Commonwealth Financial Network, Member FINRA/SIPC. Contact him at Pacific Crest Wealth Planning, jcmanocchio@pacificcrestwp.com, or (530) 562-5250
