The word recession is making headlines these days. The latest GDP report showed that the U.S. economy shrank 0.9% in Q2 — and that’s after a 1.6% GDP decline in Q1.
The textbook definition of a recession is a fall in GDP for two successive quarters. While some politicians refuse to call this a recession, plenty of financial experts are sounding the alarm.
Suze Orman, for instance, says that the Fed’s aggressive rate hikes could “make it harder for businesses to finance their operations, and for consumers to consume.”
“Higher car loan rates, mortgage rates, and credit card rates become a spending headwind,” explains the TV personality.
On the positive side, Orman also suggests several proactive ways to prepare for a recession. Let’s take a look.
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Assume you are unemployed
The job market looks fine right now. According to the latest report from the Bureau of Labor Statistics, the U.S. economy added 528,000 jobs in July, topping economists’ expectations of 258,000.
Moreover, the unemployment rate edged down to 3.5%, tying for a decade low.
But Orman warns against complacency.
“If there is a recession, you better believe the same firms that are hiring now, will be looking to reduce their payroll,” she writes. “I think the best gift you can give yourself right now is to imagine you are laid off.”
In December 1969, the unemployment rate in the U.S. was an equally low 3.5%, yet an 11-month recession followed right afterward.
When you are laid off, paychecks stop coming in. So Orman highly recommends building an emergency savings fund.
How many months of financial cushion do you need?
Orman suggests having enough savings to help you cover your expenses for a year. If that seems like a far-fetched target, just focus on saving as much as possible — one month at a time.
Eliminate your credit card debt
Credit cards are a great invention — for companies that offer you credit cards.
For those that have an unpaid balance on their credit cards, debt could balloon dramatically during a recession.
The reason? High interest rates.
The average credit card interest rate rose to just over 21% in July 2022. At that rate, the compounding factor can make any unpaid credit card balance grow to dangerous levels very quickly.
Orman notes that carrying credit card debt right now is “asking for so much trouble” as interest rates are on the rise.
She’s not the only expert who believes you should get rid of credit card debt altogether.
Legendary investor Warren Buffett has also warned about the danger of carrying an unpaid credit card balance.
“If I owed any money at 18%, the first thing I’d do with any money I had would be to pay it off,” Buffett said in 2020. “You can’t go through life borrowing money at those rates and be better off.”
Don’t spend it all
In an economy where unemployment is low and wages are rising, it would be easy to assume that people are piling money into their savings.
But that’s not the case.
According to a recent report from LendingClub, 61% of Americans are living paycheck to paycheck.
Inflation is one reason why people are having trouble saving – nearly everything has gotten more expensive. Another reason is having insatiable needs.
Orman stresses the importance of living below your means. In fact, she says it’s the best piece of advice she has for her readers at the moment.
By spending less than you earn, you can build up your emergency savings faster. And by getting used to a more frugal lifestyle, you can lower your living costs — so the same financial cushion can last longer in the event that you lose your job.
“A dollar not spent is another dollar you can add to your emergency savings or use to reduce your credit card debt,” she concludes.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Source: finance.yahoo.com