How to prepare for a recession

A majority of US households are taking the possibility of an economic recession seriously, new research suggests.

According to financial group BMO’s latest Real Financial Progress Index, 84% of respondents in a recent survey said they were concerned about a recession before the end of the year, and 76% said they were making lifestyle changes in preparation.

Best thing they do: Delay major purchases like a house or car (34%). This is followed by paying off debt (29%) and planning to cut holiday spending (28%).

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The survey of approximately 3,400 American adults was conducted from July 27 to August 29. It also showed that 74% of Americans said their concerns about inflation had increased.

“People are less confident about their finances than they were a year or even a quarter ago,” said Tina DeGustino, director of consumer strategy at BMO.

While many adults think the US is already in a recession, there are some experts warning that a recession is coming. A recession is typically defined as two quarters negative economic growth along with other factors such as an elevated unemployment rate.

The first part of this calculation is already correct: According to the Bureau of Economic Analysis, the economy shrank by 1.6% and 0.6% in both the first and second quarters of this year. (An estimate for the third quarter will be released on October 27).

However, the labor market remains tight. The unemployment rate is a low 3.5%, according to the US Bureau of Labor Statistics. And there are 1.7 open jobs for every available worker.

At the same time, persistently high inflation – 8.2% last year – is weighing on household budgets and prompting the Federal Reserve to continue raising interest rates. The general idea is that by raising the cost of borrowing, spending will decrease – which in turn will slow consumer demand and ease inflationary pressures.

However, this can also result in job and/or income losses – which is generally the main pain point for households in a recession.

“If we’re going into a recession, that doesn’t mean it’s bad or long-lasting,” said board-certified financial planner David Mendels, head of planning at Creative Financial Concepts in New York. “And it doesn’t mean you’re going to lose your job — or if you do, it doesn’t mean you won’t get another.”

At the same time, it’s always a good idea to have a financial cushion in case you lose a job, regardless of what’s going on in the broader economy.

“You should have six months to a year’s income in savings anyway,” Mendels said. “Bad things happen even when there is no recession.”

Keep in mind that while your emergency fund should generally be in a cash account, rising interest rates mean you could potentially get a better return on your money than you’re currently getting depending on where you keep it, Kathryn Hauer said. a CFP with Wilson David Investment Advisors in Aiken, South Carolina.

“Open a high-yield savings account to keep your money,” Hauer said.

The bottom line is that if you’re feeling vulnerable to what a recession could do to your financial security, it pays to adjust your budget so you can build a cushion to weather a job loss.

“If you have that safety net, you can look to the future with more confidence,” Mendels said.

He also said it might be worth opening a home equity line of credit now and not using it. And then if you lose your job, you have access to funds.

“You would come out of unemployment with debt, but you could eat and you wouldn’t be behind on other bills,” Mendels said.