Home | News | Commentary | 7 Actionable Steps to Take During a Recession

7 Actionable Steps to Take During a Recession

518 Views

By Staff Writer

August 24, 2022
6:54 am
Los Angeles, CA

"If you’ve been waiting for an invitation, this calligraphy is it. Commissioned by Facebook, this is a hand-lettered design for a poster. Quote is Facebook mine "

- Massimo Vignelli

The Federal Reserve isn’t flinching when it comes to inflation. It’s attacking it head-on. With inflation at 9.1%, the U.S. now faces the most intense breakout of inflation in more than 30 years. In response, the Fed recently raised interest rates twice by 0.75 percent of a point. It will probably do so again in September. Raising rates, the Fed hopes, will slow inflation. But the Fed needs to be careful. Raising interest rates can trigger a recession—something the U.S. hasn’t experienced in quite a while. Recessions, simply put, are business cycle contractions in spending. Events like a financial crisis, an external trade shock, an adverse supply shock, and the bursting of an economic bubble can trigger recessions or economic slowdowns. The textbook definition of a recession says you’re

But the Fed needs to be careful. Raising interest rates can trigger a recession—something the U.S. hasn’t experienced in quite a while. Recessions, simply put, are business cycle contractions in spending. Events like a financial crisis, an external trade shock, an adverse supply shock, and the bursting of an economic bubble can trigger recessions or economic slowdowns.

The textbook definition of a recession says you’re in one when the country’s Gross Domestic Product (GDP) registers negative growth for two consecutive quarters. America’s real gross domestic product (GDP) decreased -1.65% in the first quarter of 2022, followed by a -.09% drop in the second quarter of 2022. But this definition is flexible. So, if we’re not in a recession right now, we’re close to it.

Some tell-tale signs that were in a recession:

High rate of unemployment
Falling incomes
Slowdown in business activity and spending
Drop in consumer spending
Increased business failures

When these factors coincide for a sustained period, it can lead to the severe drop in spending that characterizes recessions. If the drop in spending doesn’t lead to a recession, it may lead to a severe economic slowdown, which can be almost as bad as a recession. (One bit of good news on the economic front is that the U.S. created 528,000 jobs recently.)

Steps to Beating an Economic Recession

Recessions can dramatically affect your living standard, retirement plan, and/or investment strategy. So, you need to respond accordingly to survive this financial mess.

Below are seven actionable steps to take to navigate a slowdown or a recession:

Restrict major purchases and slim down your lifestyle. Make only need to have, not nice to have, expenditures.

Re-build your emergency fund. This step can be as simple as having a savings account with 6+ months’ worth of funds. An emergency fund provides financial stability during tough economic times.

Protect yourself from a layoff. Stay flexible, do high-quality work, be a source of positivity, not negativity, and manage relationships with key decision makers.

Supplement your income. This action is often called a side hustle. You can start a blog, do DoorDash, Uber, or Lyft, begin an Amazon business, or find other ways to earn quick cash.

Create a budget and financial plan. That will help you navigate the downturn. The plan doesn’t have to be complicated. Simple works, too.

Assess your asset allocation. Maybe your stock portfolio of 80% equities and 20% bonds is working anymore. Instead, try a 70%/30% mix or even a 60%/40% mix.

Refinance your student loan debt or your mortgage. Rates are still relatively low, so look for opportunities to do either or both.

These seven steps are proven tactics for dealing with an economic downturn or recession. Executing them in a timely manner will help you weather the current economic storm.

Investing During a Slowdown or Recession

Investing during a recession is also challenging. You know what we mean if you’ve been funding your 401(k) or Roth IRA regularly only to see it drop by 15% or more. This result is hard to get used to, but it’s common during financial crises.

Nevertheless, you need to keep making your regular investments despite what’s happening

That can be hard during times like these. But the goal of these investment vehicles is to try not to access them until retirement.

So, if you stay the course, you’ll survive and thrive. Investment experts call this approach dollar cost averaging. It’s a proven strategy for building a solid retirement plan or investment portfolio that will pay off in the future.

Also, if you have an investment counselor, work closely with him or her to help you get through this mess. If you don’t have an advisor, consider finding one. He or she can help you set a profitable course for the future and avoid crashing into the rocks.