How to stress test your income amid rising recession fears

With a recession already forecast for 2023, the recent bankruptcies of Silicon Valley Bank and Signature Bank have further fueled fears that an economic downturn could be looming.

However, it remains to be seen when a recession – defined as two consecutive quarters of negative GDP growth – will hit, if at all.

Still, many Americans — 41% — have taken steps to prepare for a potential economic downturn, according to a Morning Consult poll. This survey of 2,203 adults was conducted in February, well before the recent banking woes hit.

Now all eyes are on the US Federal Reserve, which will decide whether to hike rates further or put its anti-inflation strategy on hold while it watches the banking sector at its meeting next week.

What the Fed might do is “throw,” predicted Eugenio Aleman, chief economist Raymond James, noting that the central bank has access to much more information about banks than the general public.

Raymond James still expects a 25 basis point rate hike next week.

An increase would affect everything from how much interest borrowers pay on debt like credit cards, mortgages and car loans, to how much consumers earn from their cash.

Those preparing for a recession are taking two main steps, according to Morning Consult — 44% say they’re saving more money or building an emergency fund, and 39% say they’re cutting spending or spending more strategically.

A small proportion, 11%, reported storing goods or groceries. The remaining 6% indicated “other”.

“Really huddled together and preparing for tough times seemed to be a popular theme,” said Amanda Jacobson Snyder, data reporter at Morning Consult.

As the banks’ woes made headlines, clients have begun to raise more pressing concerns, according to Kamila Elliott, a certified financial planner and co-founder and CEO of Collective Wealth Partners, a boutique advisory firm in Atlanta. Elliott is a member of CNBC’s Financial Advisor Council.

Much of this is PTSD from the 2008 global financial crisis, according to Elliott. But the numbers today — including recent stock performance — are stronger than they were then, she said.

Still, there are a few steps advisers say you should take now to ensure you’re prepared for a downturn.

A lot of how a recession can affect you depends on one thing — whether or not you still have a job, noted Barry Glassman, a board-certified financial planner and founder and president of Glassman Wealth Services. Glassman is also a member of CNBC’s Financial Advisor Council.

An economic downturn could also mean that even those who are still employed earn less, he noted.

So it’s a good idea to assess how well you could handle a drop in income.

“Stress test your income against your ongoing obligations,” Glassman said. “Make sure you have some kind of safety net.”

While the US economy is still buoyant, the recent banking woes could have implications for employment, according to Raymond James’ Aleman.

“The biggest risk today because of these events is that companies get scared and start slowing down hiring,” he said.

With the banks’ woes making headlines, a client recently asked Elliott if it would make sense to move more funds into gold.

Her answer: no.

But topping up emergency money should be a priority, she said. That way, if you get fired, you’ll have enough money to support yourself for a period of time without having to go through a fire sale, Elliott said.

Admittedly, with persistently high inflation, it can be harder to find extra money. Those higher costs have prompted some of Elliott’s clients to cut back on certain extras, like grocery delivery, to find more wiggle room in their budgets.

“Some of the luxuries that we had during Covid are kind of disappearing because people’s budgets are being squeezed,” Elliott said.

“People are realizing they can’t go on like this,” she said.

The upside for conservative investors is that they can now get higher rates of interest on their money.

“They’re finally getting a safe return on their money,” Glassman said.

Higher interest rates mean consumer debt will continue to rise.

Elliott said she recently saw a credit card that charges an APR of 30%.

Experts say it might be wise for consumers suffering from high balances and rising interest rates to find a way to renegotiate what they’re paying on that debt.

Better yet, paying off that debt, or paying it off in full, will help add financial flexibility to your budget.

Student debt holders should also keep in mind that they will likely be back on the hook to resume federal loan payments soon.

Because the benefits of paying those balances directly are limited, Elliott says she encourages customers to instead put the money they would pay for those debts into a savings account, which can earn 4% interest.

“As soon as payments resume, wire that money and pay off or pay back that student loan,” Elliott said.