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How to Navigate an Economic Downturn
Mar 23, 2023 Economists often disagree on the exact definition
of a recession. The National Bureau of Economic Research (NBER) determines when recessions begin
and end in the U.S. Their definition is a decline in economic activity that
lasts for several months and affects a significant portion of the economy
rather than just one or two sectors.
As companies wrestle with weak demand and lower profits, layoffs may start making headlines.
When unemployment rises, people tend to tighten their wallets, spending only on what they need and putting off any unnecessary expenses. This can eventually impact other parts of the economy and the stock market, which means that even if you aren't at risk of losing your job, a recession can still impact your pockets.
Measuring a recession after the fact is one thing, but it's difficult to try to predict the start or severity of a downturn.
So how do you navigate a shaky economy? Preparation is the key to being able to ride out an economic downturn.
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Get started1. Get a handle on your debt
In good times, carrying
some low-interest debt might have made sense. Take the past decade, for
example. Interest rates sat at near zero for almost a decade and stocks seemed to march higher with each passing
day. Your investment earnings may have actually outpaced your debt payments
each month. So it may have been wise to make your minimum monthly debt payments
on low-interest debt and invest as much as possible.
But in a recession,
everything changes. The Federal Reserve usually steps in with interest rate hikes
and the stock market cools off, making debt payments steeper and slowing down
your investment returns.
So, if you can, prioritize your debt. Consider making an additional payment on your credit card or loans so you're not caught in a tricky situation where you can't make a payment or your debt accumulates too fast.
You may also be able to transfer or refinance existing high-interest debt to a lower rate. For example, some credit cards offer a 0% intro APR when you transfer an existing balance.
2. Budget according to your priorities
A budget is a living, breathing thing that should
evolve over time. In good times, you may have line items in your budget for
going on a vacation or eating out. But when the bad times roll around, you may
need to adjust.
Start by reviewing your budget and
identifying areas where you can cut back if you need to. If you follow the 50/30/20 budget rule — 50% of your income goes to
needs, 30% to wants, and 20% to savings — find areas where you can trim your
spending on unnecessary items. That's the 30% of your budget spent on
vacations, restaurants, and other fun activities.
Focusing on this portion of your budget, rather than needs or savings, may hurt in the short term, but it will help improve your ability to pay your bills or achieve your long-term goals.
And if you're still in a pinch, you may find some wiggle room in your needs. Perhaps you pay too much on rent or your mortgage. There may be opportunities to downsize or refinance your mortgage, which could save you hundreds of dollars each month.
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3. Supplement your income
If you still find yourself
strapped for cash, try finding additional sources of income from odd jobs or side
hustles.
4. Try to avoid cashing out your investments
When the market reverses, and your investments take a haircut, it's natural to question how you can stop the bleeding.
Don't sell if you can avoid it! We can't stress this one enough. Your investments may be down double digits during a recession, but you only lock in those losses if you sell.
Eventually, downturns turn into upturns (historically, this has always happened). If you sold everything once the market started dipping, you could miss out on the chance for those investments to bounce back and grow.
5. Invest more, if you can
Another strategy is to invest more when possible.
The market may be down 20, 30, or 40% during a recession, and that can be hard to weather. But the glass-half-full view is that this means the market is trading at a discount to yesterday's prices.
By continuing to invest for the long term, you can potentially take advantage of these market "sales" and give your money a better chance to grow over time.
It's easy with Acorns Invest. Make a one-time or recurring investment, and we'll recommend a diversified portfolio based on your goals. It takes the guesswork out of already uncertain times. Start saving and investing today with Acorns.
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