As of November 2022, the United States is not experiencing a recession by official metrics. Even so, we recommend preparing yourself and your finances for the possibility of a recession.
It’s been hard to miss the effects of the 8.8% inflation in 2022. Everything is more expensive— groceries, clothes, dining out, you name it—but there are opportunities to improve your finances. Let’s take a look at 6 money moves you can make to prepare for the possibility of a recession.
Take a closer look at your spending
The first thing to do if you’re concerned about a recession is to study your spending habits. Take a closer look at your credit card bill and know exactly how much you spend each month.
Monthly memberships and subscriptions add up quickly, and you may be surprised how little you utilize them. Perhaps you purchased a one-month subscription to Netflix to watch a show you were dying to see, or you tried out a coffee-of-the-month subscription and didn’t end up loving it. We often forget to cancel things like these and continue to eat up the monthly costs.
When you have a better idea of your spending habits, you can create a more balanced budget. Budgeting can seem daunting, but the 50/30/20 rule makes it simple. This budgeting method breaks down your spending into 3 categories: 50% on needs, 30% on wants, and 20% on savings. During times of recession, those percentages can adjust.
Focus on high-interest debt
With prices skyrocketing, it can be really easy to turn to your credit card or pay later services to purchase things—even when you may not be able to afford them. While these things can certainly help you out if you’re in a pinch, they can drastically affect your financial health.
The average interest rate on a credit card is 18.94%. So if your interest rate is 19% and you carry a $600 balance, you would owe nearly $120 in interest after a year. In short, high-interest debt builds up fast, and it can be difficult to control after a certain point.
Credit card debt can reduce your credit scores, making it harder for you to secure a loan when you need one. It can also lead to extreme stress and anxiety, reducing your quality of life.
There are a few ways to pay off high-interest debt quickly:
- Pay more than the minimum payment
- Carry cash, you’ll see it’s much easier to swipe a credit card than hand over a $20 bill
- Set up payment reminders
- Pay your credit card bills more than once a month
Fill out your emergency fund
No matter the economic state, having an emergency fund is vital for your financial well-being. But as we approach the possibility of a recession, having a healthy emergency fund should be a top priority.
We typically recommend 3-6 months of total living expenses to be stored safely in an emergency fund. With a recession in mind, if you can save on the higher end of that scale, it would be wise to do so.
Your emergency fund should cover critical expenses including:
- Rent or mortgage
- Car and transportation expenses
What shouldn’t be included in your emergency fund? Things that would be cut from your budget if an emergency struck, such as:
- Dining out
- Subscriptions (Netflix, Hulu, Bark Box, etc)
- Unnecessary shopping
Remember: emergency funds are a worst-case scenario. They aren’t meant to spark fear that you may lose your job. It’s about being prepared for any situation that may be thrown at you.
Utilize dollar-cost averaging
Dollar-cost averaging is an investing strategy where you buy a fixed amount of an investment on a regular basis regardless of the current price. By utilizing this approach during a recession, you’ll continue to buy shares as the price declines.
For example, if you invest $200 each month, that $200 will buy fewer shares when the market is up. But it will buy significantly more shares when the market is in a downturn.
When a recession is on the brain, it can be tempting to avoid investments at all costs, but using dollar-cost averaging will benefit you in the long run. Remember, what goes up must come back down again, and vice versa.
Think about investing in dividends
If you want to keep your money in market-based investment, you could consider investing in mutual funds or exchange-traded funds. Investing in these types of funds is typically less risky than investing in individual stocks and offers more downside protection than other investments.
Another benefit of investing in dividend-paying stocks, mutual funds, or exchange-traded funds is that the dividends can be reinvested.
Consider investing in alternative investments
Alternative investments are financial assets that don’t fall into traditional investment categories like stocks or bonds. They tend to be a great investment option during a recession because they have a low correlation to market volatility and source funds differently.
Traditional investments are left to the market’s volatility, but Hedgehog’s investment model is different. Our model uses investor funds to help young, promising companies qualify for long-term financing. However, because we don’t invest in these companies, your investment performance does not depend on their long-term success, and you’ll see 12-20% in returns.
Above all, don’t panic
The key to surviving (and thriving) during a recession is to remain calm and steady. If a recession is coming, no one knows how long it will last or its effect on the economy. The best investment strategy during a recession is to avoid making rash decisions—assess your portfolio performance and financial goals and make necessary adjustments thoughtfully and deliberately.
If you’re interested in learning more about how an alternative investment can help diversify your portfolio, get in touch with our team here.
This material is intended for informational purposes only and should not be construed as legal or tax advice. Information here is not intended to replace the advice of your investment advisor or financial advisor. This information is not an offer or a solicitation to buy or sell securities. This information may have been compiled from third-party sources and is believed to be reliable. All investing involves risk, including the loss of principal.