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Preparing for a recession

5 ways to prepare your finances for a recession

You don’t need to be a financial expert to understand the financial challenges we all face. We experience them as we go about our day-to-day lives, such as when we pay for our groceries or housing.

It comes as no surprise, since inflation is close to a 40-year high1, and interest rates are skyrocketing. In September 2022, groceries cost 13% more than they did a year prior.2 In 2022, a 30-year fixed-rate mortgage increased by 3.86% in a matter of nine months — starting at 3.22 percent in early January and ending at 7.08% in early November.3 Credit card interest rates are at an average of 22.21%.4

Everything is up. And this may get us feeling down.

But there are ways that we can prepare our finances for a recession. In fact, one survey reports that 76% of American adults are already making lifestyle changes to help prepare them for what’s ahead.5

Here are some things you might consider doing.

1. Make a budget

It’s simpler than you might think. And once you have one, you can better reach your goals — such as building an emergency fund [see point #4]. Plus, you can easily tweak your budget, if and when it’s needed.

Here’s how to make one.

First, figure out your net income — which is how much money you earn (your total take-home pay) after taking out taxes and any money that goes toward a health insurance plan, FSA, or an employer-sponsored retirement account. If you are self-employed, be sure to deduct 15.3% (for self-employment tax) from your earnings to get an accurate amount for a net income.

Then, divide your annual net income by 12.

Next, list all your monthly expenses. Be sure to label them as a fixed or a variable expense. Fixed expenses are bills that don’t fluctuate (i.e., mortgage, insurance). Variable expenses can fluctuate month to month (groceries) and some can even be removed (i.e., gym membership).

Determine how much you spend on each expense every month. Fixed expenses such as mortgages and auto loans are easy to figure out. Other expenses, such as electric and gas bills, fluctuate month to month. As do groceries and household goods. To calculate the average monthly amount for these expenses, add up the last three months’ worth of each expense and divide it by three.

Finally, compare your monthly expenses to your net income. If the former exceeds the latter, then reevaluate the more flexible expenses. Stick to your newly created budget and any “extra” money should go in your emergency fund.6

2. Limit/cut expenses

Making a budget serves as a real eye-opener. Oftentimes you discover how much money you’re putting toward something you don’t actually need. Start by thinking of ways you can trim the fat. Here are some ideas to get the ball rolling:

  • Unsubscribe to publications and streaming services
  • Enroll in rewards programs at stores you frequent regularly
  • Reduce your energy use (This should be high on the list since electricity accounts for 12% of the household budget)7
  • Don’t leave home without your shopping list — and stick to it!
  • Shop around for a better price on car and home insurance

The point is, be aware of what you’re spending your money on and always think how you might be able to get a better deal.

3. Pay down debt

Large credit card and student loan debt can challenge your peace of mind while dealing with a recession. There are a couple ways to approach paying off debt. One strategy is the debt avalanche — focusing on paying off the largest debts with the highest interest rates first. The other is the debt snowball — focusing on paying off the smallest debts first. Both have their advantages: one saves you more money in the long run and the other fast tracks your sense of accomplishment.

To help you avoid racking up more debt, take some practical steps like deleting credit card info from your favorite online stores. This will remove the ease of making late-night, emotional purchases.

You can get to the finish line sooner if you add more money to the pot. You can do so by selling clothing and household items. Or by taking on a side hustle, such as pet sitting.8

4. Boost your emergency fund

Once you build a solid financial foundation of creating a budget, limiting expenses, and paying down debt, you’re ready to add to your emergency fund. Some experts say your goal should be to accumulate six months’ to a year’s worth of your annual income in a high-yield savings account.5

That’s not a realistic goal for many of us, especially when times are tight. So just do what you can and make it easier on yourself by setting up automatic transfers from your checking account to your savings account. Just be sure to keep enough money in checking so that you don’t overdraft your account.9

5. Keep your investment smarts — don’t panic

Some experts say that an upcoming recession will be less impactful on markets than the Great Recession and the Dot-Com Recession. Even so, it’s difficult to see our returns and growing wealth diminish. Many professionals often suggest keeping your cool by looking forward and remaining fully invested and focused on long-term goals.10

Thankfully, the average recession lasts just 10 months.11

With the market down 20% for the year and higher-growth technology stocks down 30% to 70%, you want to stay on top of your finances.11 So review your investment strategy with your financial professional and talk about ways to protect your money. That way you’ll be ready for when the stock market comes back and the economy improves.

It’s never fun to be in a recession. But there are things that you can do now to lessen its long-term impact on your finances.

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5 steps to building an emergency fund  (article with video)

Having extra funds available for emergencies is an essential part of your overall financial well-being — but saving can seem daunting. See five steps to build an emergency fund.

1. Wang, Penelope. “How to Save Money As Consumer Prices Stay High,” consumerreports.org, October 13, 2022.

2. “Summary Findings: Food Price Outlook, 2022 and 2023” U.S. Department of Agriculture, November 22, 2022.

3. Rothstein, Robin. “Mortgage Rates Forecast for 2023: Will Rates Drop?” forbes.com, December 6, 2022.

4. Schulz, Matt. “Average Credit Card Interest Rate in America Today,” lendingtree.com, November 21, 2022.

5. O’Brien, Sarah. “Delaying big purchases, reducing debt: 76% of adults are making lifestyle changes to prepare for a potential recession,” cnbc.com, October 13, 2022.

6. White, Alexandria. “How to Create a Budget in 5 Steps,” cnbc.com, September 8, 2022.

7. Milliken, Maureen. “12 Easy Ways to Cut Your Expenses,” debt.org, August 26, 2022.

8. Kerr, Emma. “14 Easy Ways to Pay Off Debt,” money.usnews.com, February 23, 2022.

9. Little, Kendall. “5 Smart Ways to Grow Your Emergency Fund in December 2022,” time.com, January 5, 2022.

10. Hicks, Coryanne. “How to Invest During a Recession,” forbes.com, September 12, 2022.

11. “How Do Investors Prepare for a Recession?” forbes.com, November 9, 2022.

This is a general communication for informational and educational purposes. The information is not designed, or intended, to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in (or refrain from) a particular course of action. If you are seeking investment advice or recommendations, please contact your financial professional.

Investments will fluctuate and when redeemed may be worth more or less than when originally invested.

DOFU 12-2022

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