The Deutsche Bank is the first major bank in the U.S. to forecast a "soft" recession. The reassurance comes from the Fed's efforts to depress stubborn inflation. The Deutsche Bank economist said on Tuesday that there was a big recession. According to the Fed, inflation could peak within the next year, but it will take more than 10 days to return below the Fed target. This means the Fed could raise rates so aggressively that this could hurt the economy. Initially, when GDP starts to fall, it is indicative of a downturn. Sometimes growth is negative and turns positive over a year. Sometimes the Bureau will change GDP estimates in the next report.
It's impossible for someone to know when their economy is going down. This is how the NBER calculates this monthly statistic. These provide a more straightforward estimate of growth. The economy is going down if economic indicators decline.
Preparing for a Recession
It's impossible to know when or where a recession will happen, and economists can't predict when they will occur, and they are inevitable. All we can do is be prepared for one and hope it doesn't get as bad as the 2008 recession.
Recessions can be mild. Economic activity declines, but the trend reverses quickly. Other recessions, such as the Great Recession, wreak havoc on millions of people's financial lives for 18 months before economic growth resumes. Following the Great Recession, growth would continue into the 2020s.
There are steps that you can take to protect your financial situation. You can't control what happens in the wider economy, but using economic principles and information to help you make informed decisions and keep pace with investing trends.
Start with a sustainable spending plan.
When budgets are sparse, a better grasp of the amount helps us prepare and adjust.
You may have to consider your finances in the event of a decline in income. If you are unable to maintain your spending habits or have decreased income, make a list of bills and apply for any available assistance from certain organizations.
Adjust your spending by only paying 50% of your general expenses, 30% of wants, and 20% on savings or debt. Track where you spend your money by keeping a budget on an online tool or using a worksheet.
To save money, look for places to trim. Finding ways to save will help you bulk up your emergency fund or lower your debt load proactively.
A side hustle can not only help out with an emergency fund but also be used if hours or wages are cut. A side hustle can also provide a Plan B to lessen the possible impacts of an event.
If the field of employment you are in is vulnerable to a recession, consider keeping your resume updated and be diligent about networking. Having a game plan to handle job loss will help lessen the impact on your life when it eventually happens.
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Increase savings before a recession
Start saving your monthly income by finding little things to save on. If you can buy in bulk and be careful about where you spend it, that will help cushion you when your income drops.
If you have some savings, then one thing you can do is switch to a high yield savings account and earn interest. The Federal Reserve has slashed interest rates recently, but some people still get north of 1.50% APY. Compare that to the average savings rate, which is 0.09% APY.
Have your checking account transferring funds to savings regularly. Saving your tax refund and any other windfalls will help you prepare for emergencies.
To avoid paying monthly fees, consider opening a savings account that does not charge them. There are plenty of options, so shop around and find the best fit for you.
An emergency fund is key to weathering a recession. If you don't have one, start small by saving $20 from each paycheck until you reach $1,000. Once you have that, continue to save 3-6 months of living expenses. This will help you greatly.
Paying debt and becoming debt-free is also a great way to free up savings. If you can pay off some high-interest debt before a recession hits, do it. This will reduce your monthly payments and free up some cash flow. Start with the debt that has the highest interest rate first and work.
How to protect yourself against a recession
Credit card debt can cause you to quickly accumulate more and more interest if you don't make timely payments, and it can quickly increase. If the interest is left unpaid, the debt could become unmanageable.
Balance transfer offers have the potential to save you money on interest charges. However, average individuals with average credit can't qualify for these offers. If you can't qualify for a balance transfer or to use one of these offers, make payments on your high-interest debt or consolidate your loans. The sooner you pay off the balances, the more you'll save in interest charges.
If you need to borrow money, having good credit can get you lower interest rates on loans or even 0% APR offers on credit cards.
It is possible to improve your credit score if you have the resources and the time to do so. Pay your bills on time and make a debt payoff plan. Choose to apply for new lines of credit only when you need them. At the same time, you can keep tabs on your credit score. You can do this for free through websites like NerdWallet or your bank.
Tips for students in the times of recession
Federal student loan interest rates have been frozen and will stop accruing until September 30th. Loans eligible for this suspension of interest rates are Direct Loans and loans from Parents, Graduates, or Perkins. Private loans are not eligible for this program. You could look for other forms of financing or downsize your living situation.
If you can afford your student loan payments, consider continuing to make those payments. You'll chip away at your principal balance even more quickly than if you were completely out of payments. Contact your servicer to continue making payments. But if you go through a significant change like being laid off from work and being unable to pay for the payment waiver period, there are other options for easing the burden that federal student loans put on borrowers in this situation:
Apply for an income-driven repayment plan to keep your payments affordable. This gives you the maximum range of 20% - 10% of your discretionary income and forgives your debt after a set amount of time.
Pausing your loan payments to get caught up is the best option for when you're in a tight spot. Forbearances from federal loans are automatically placed in six-month periods. No interest will accrue during this time of pause and payment.
If you qualify for unemployment deferment or economic hardships, contact your servicer about the options.
For immediate relief, contact your lender about forbearance or deferment options. Interest will continue to accrue if you do this. You can also take advantage of low-interest rates by refinancing your loans and paying back the loan with a lower interest rate.
There may also be opportunities to refinance your student loans at a lower interest rate and save money over the long term. By refinancing your federal student loans, you can save money in the short term, but you lose out on the opportunity to lower monthly payments through income-driven repayment plans and partake in a program like Public Service Loan Forgiveness, which forgives most of the balance after 10 years.
Finally, keep in mind that if you work in the public sector or for a non-profit organization, you may be eligible for loan forgiveness after 10 years of payments. If the recession causes an economic decline, remember that your student loans are not dischargeable in bankruptcy and cannot be forgiven. Therefore, you will want to explore other options such as payment deferment or forbearance through federal programs. If you cannot make the payments on time, contact your lender immediately to find out what other options might be available before they start sending collection calls.
Significant Economic Decline
Market downturns can create uncertainty in your investments. However, when the market is at its lowest point, you can buy more stocks with your regular fund contributions.
Studies have shown that people feel a loss twice as much of a gain, meaning they are more likely to sell stocks when a buy-and-hold strategy would be smarter.
Even the best investors may not be able to predict when the market will rise and fall. However, patience and regular reinvestment will often pay off even after a deep recession.
If you invest in a diversified portfolio, don't give in to anxiety by checking its value every day. Investing over the long term will prove beneficial to the investor, as they might forget the market's history of rebounding from tough times and moving beyond them with enough time.
If you're a renter, find ways to save money to have around in case your income is disrupted. Consider getting a roommate or another dwelling to reduce the rent. If you're a homeowner and want to stay that way, the best game plan for you will be whether or not to buy or sell your home.
To avoid buying too many homes, use NerdWallet's home affordability calculator and choose a price in the "affordable" range, not in the "stretching" or "aggressive" ranges.
Lenders usually require buyers to save up a minimum of six months' worth of house payments in savings. However, this may not be enough during an emergency. Save extra money so you'll be able to afford repairs and even if there is a break in your income. It's possible that the next economic recession will not affect the housing market.
Homeowners can keep and cut their bills by refinancing at a lower interest rate. When the economy is in recession, mortgage rates will usually drop as well, allowing homeowners to refinance and reduce their costs. If you're willing to wait out the lenders, they often begin lowering rates again once they've processed the first wave of customers.
You should either save up to three or six months of expenses. A HELOC can provide additional funds if you're struggling. Apply for one while you still have a steady income so that you can qualify.
While this option is available to anyone, it's particularly relevant for homeowners who are in a tough spot. If you have enough equity in your home, a HELOC can also provide emergency funds when you need them most.
If the recession causes an economic decline, remember that your student loans are not dischargeable in bankruptcy and cannot be forgiven. Therefore, you will want to explore other options such as payment deferment or forbearance through federal programs. If you cannot make the payments on time, contact your lender immediately to find out what other options might be available before they start sending collection calls.
There may also be opportunities to refinance your student loans at a lower interest rate and save money over the long term. Finally, keep in mind that if you work in the public sector or for a non-profit organization, you may be eligible for loan forgiveness after 10 years of payments.
A recession can be a difficult time for many people, but there are ways to prepare. By saving up money, diversifying your investments, and understanding your options, you can weather the storm and come out on top.
The Personal Finance Advice Every College Graduate Needs
For years, you've lived on a college budget, scrounging meals where you can, buying gas on a trip-by-trip basis, and probably never once thinking of what the future holds when it comes to personal finance.