Mark Hauser, experienced financial services professional, discusses various strategies for successfully navigating an economic downturn. In summer 2022, many United States economists endlessly debate on whether the country has officially entered a recession. Even if that’s not yet true, most financial experts say the country’s economy is certainly headed for a collective downturn. Historically, economic slowdowns have led consumers to minimize spending to conserve their valuable cash. In turn, businesses reduced prices and expenses while pausing capital projects and upgrades. Taken together, these actions served to further shrink the economy. Stated another way, it’s a self-fulfilling prophecy. With this scenario as a backdrop, private equity principal Mark Hauser recommends that consumers take steps to get their financial houses in order. Priorities should include bolstering their emergency funds, reducing high-interest debt, and re-evaluating investments’ asset allocations, among other goals.
Recession vs Economic Downturn
The National Bureau of Economic Research (or NBER) says a recession is triggered by two back-to-back quarters of negative economic growth. This growth is typically measured by the country’s gross domestic product (or GDP). Collectively, the GDP represents the total value of all marketable goods and services produced during a certain period.
In late July 2022, the United States Commerce Department released the second-quarter GDP figure. From April through June, the United States’ economic growth shrank 0.9percent. From January through March, the GDP had already fallen 1.6 percent. Additional signs of a downturn often include higher unemployment and a softening housing market. Even with these telltale figures, the NBER won’t confirm a recession. The agency says it needs to examine additional data to make that determination. Specifically, the NBER considers the depth of an economic decline along with consumer spending trends. Regardless of economists’ views on a recession, they generally agree that the United States is headed for an economic downturn. In the biggest indicator, the FederalReserve is aggressively (and consistently) raising interest rates to blunt inflation.
However, there’s a good chance the economy will cool too much, setting the stage for a recession.
Strategies for Negotiating an Economic Downturn
Consumers may be faced with certain financial challenges during the coming months.The Federal Reserve’s actions may trigger some consequences while others will take place for other reasons. As Mark Hauser notes, careful preparation, a concrete strategy, and perhaps professional advice will enable consumers to successfully navigate the obstacles.
Perform Monthly Budget Reviews
In the face of higher consumer prices, a potential job loss, and general economic uncertainty, reducing expenses is a smart strategic move. However, a casual attitude toward expense reduction will probably not get the desired results. Instead, conduct a ruthless monthly budget review. Identify all areas that can benefit from expense reductions. Examples include restaurant meals, pricey snacks and beverages, and name-brand groceries. Curtailing shopping splurges will also be useful.
For maximum benefit, everyone in the household (including teens) should be involved in this cooperative effort. Manage Higher Interest rates as the Federal Reserve continues its aggressive interest rate hikes, borrowing costs will continue to rise across the board. Mortgage rates are considerably higher compared to 2021’s numbers. Car loans, personal loans, and business loans will likewise carry higher interest rates. Adjustable (or variable) interest rates will also continue to rise, emphasizes Mark Hauser.
This makes it harder for consumers and businesses to pay off debts. Therefore, it may be appropriate to ask lenders and card-issuing banks about lower-interest credit vehicles. Consolidating or refinancing debts into a single-interest loan could also make sense. If possible, borrowers should also pay off variable-rate debts. Before entering into a new financial agreement, borrowers should ensure the revised agreement will actually save them money.
Consumers should be wary of “too good to be true” offers that may contain undesirable fine print. Having an attorney review questionable agreements is always a good course of action.
Adopt Proactive Layoff Tactics
With a currently low unemployment rate, the labor market may appear to be relatively stable. However, several high-profile national companies have recently announced layoffs. Inflation, lower consumer demand, and rising interest rates were likely behind the job cuts. It’s logical to assume that these layoff trends could extend to other businesses in multiple industries. While stable income is available, consumers worried about layoffs should consider diverting more money to their emergency funds.
At the very least, workers concerned about job losses should build their skills, update their resumes, and cultivate relationships with influential people in their industry. Networking with other business colleagues can also uncover news of emerging opportunities. If a layoff does occur, workers should immediately file for unemployment and ensure they have health insurance in place.
Self-employed individuals should look for a new revenue stream or add a new market for an existing product. Postponing an expansion or other large expenditures may also make sense. Adding to cash reserves is always a good option, as more on-hand capital means a broader selection of choices.
Create an Extra Income Stream (or Two)
Employees concerned about layoffs, and budget-crunched consumers who want some breathing room, should add another income stream. In today’s digital world, many online freelance opportunities are available. Building a side business or adding a part-time job can also supplement the household income.
Pay Down (or Pay Off) High-Interest Debt
If possible, borrowers should increase payments to their highest-interest credit cards and/or loans. Paying off these liabilities will offer flexibility that will likely be needed when financial challenges arise. Private equity expert Mark Hauser says working with a Certified Financial Planner may be useful. This knowledgeable financial professional can help formulate a debt payoff strategy that takes the borrower’s overall goals into account.
Re-examine Asset Allocations
During an economic downturn, the stock market (and individual stocks) may see some negative outcomes. Consumers with stock investments may panic and wonder if they should sell before the stock price goes any lower. Investors with other holdings may wonder if it’s time to make significant changes in their asset allocations. Before making any drastic moves, Mark Hauser recommends that investors discuss any portfolio adjustments with a knowledgeable financial advisor.
Some online robo-advisor businesses may offer this a la carte service. In the meantime, investors should continue making their 401(k) and/or other regular plan contributions if possible.
Avoid These Mistakes During a Downturn
In the midst of economic uncertainty, consumers could make emotion-based decisions they might later regret. Before that happens, Mark Hauser recommends that individuals first step back from each anxiety-producing situation. After analyzing its pros and cons, they can make a more informed decision. If necessary, they should seek guidance from a knowledgeable professional.
Increasing Debt Obligations
Interest rates may trend lower during an economic downturn. Even if that occurs, Mark Hauser says consumers should avoid incurring additional debt. More financial obligations decrease their budget flexibility and ability to respond to emergencies such as medical bills or expensive vehicle repairs.
Incurring Additional Fixed Expenses
In an economic downturn, hiking expenses is not a smart strategy. Individuals should avoid new fixed expenses such as a higher-priced apartment, new vehicle payment, or upgraded mobile phone contracts. Subscription-based expenses also fall into this category.
Cosigning Another Individual’s Loan
Cosigning on another person’s debt (even for a family member) is always a risky proposition. If the primary borrower can’t (or won’t) complete a payment, the cosigner is responsible for doing so. Again, individuals should avoid increasing their debt burden during an economic downturn.
Assuming a Job is Safe and Secure
An economic downturn may (or may not) trigger layoffs at a specific company. With that as a backdrop, employees should avoid becoming complacent in their current jobs. Instead, they should take every opportunity to show how their skills benefit their employer. If they are considering another job, they should avoid leaving their current position until they have secured another opportunity.
Not Prioritizing an Emergency Fund
Individuals should not stop putting money into their emergency funds. Alternatively, they should not delay starting a new one. Ideally, this emergency fund should be able to handle three to six months of normal expenses (not luxury splurges). The fund should also have a cushion for unexpected events such as essential home or vehicle repairs.
Not Re-evaluating a Changing Situation
The United States economy can experience fluctuations at any time. Likewise, consumers’ personal financial situations can change with little warning. For these reasons, private equity expert Mark Hauser recommends re-evaluating the household budget on a monthly basis. Regularly reviewing asset allocations, and revising strategies with professional assistance can also set the stage for improved financial outcomes.
Working with a Certified Financial Planner
To shape these wide-ranging goals into a cohesive strategy, consumers should consider working with a Certified Financial Planner (or CFP). This financial services professional has completed multiple targeted courses and exams to receive the CFP designation. Equipped with this credential, the CFP is well positioned to help individuals and families with money management and financial planning strategies. Consumers can learn more about a CFP’s services, and how to select the right CFP for their needs, via the CertifiedFinancial Planner Board of Standards website.
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