Recessions have the potential for very real financial hardship, but there are positive steps we can take to ease the impact.
Dear Carrie,
With all the talk about a coming recession, I'm at a loss. What's an everyday recent college grad to make of it all? Are there special steps I should be taking with my money as we go through this?
—A Reader
Dear Reader,
In a time of so much economic uncertainty, this is a great question. Set against a backdrop of outsized inflation and a wildly volatile stock market, the threat of a recession is enough to make almost anyone feel uneasy.
The first thing you should know is that a recession, defined as 'a period of declining economic performance across an entire economy that lasts for several months,' is a normal part of the economic cycle. Since World War II, we've experienced a recession about every five years, with an average length just under a year.
That said, recessions can cause rising unemployment, declines in stock values and other assets, and shrinking wages, so I'm certainly not going to dismiss the potential for very real economic pain. But I can tell you that this isn't a time to panic. Following are some positive steps that we can all take to ease the impact.
1. Make yourself invaluable at work
Probably the harshest result of a recession is that people lose their jobs—and have an even harder time finding a new one. Given the 'great resignation' that we've just experienced, this may sound far-fetched. But trust me, it can happen. If you'renot in love with your current job, or feel that your opportunities are limited, or that your current employer may need to downsize, start to network now. Also start to research new job opportunities, and consider whether you need additional training or education to be competitive.
2. Pay off expensive debt as soon as you possibly can
Paying high interest on credit cards is always a bad idea, but as interest rates rise, it's going to get even more expensive. And just imagine how damaging that could be if you're out of work, even if for a short time. So start attacking that balance now, and don't charge any more if you can possibly avoid it.
3. Save as much as you can
It's always wise to have a healthy emergency fund, but that extra cushion becomes even more important during a recession. So divert those funds for any unnecessary purchases into your savings account (this is the time to flex those 'live within your means' muscles, big time). Resist the urge to fall into the 'buy now, pay later'trap. We generally recommend that you have at least enough to cover three months of nondiscretionary expenses, but in the face of a recession, I would try to increase that to six or more months. That way, should you lose your job or have to take a lower paying job, you won't be in a jam or forced to sell investments when they're potentially at a low.
4. Stay invested—and diversified
It's easy to get spooked by dropping stock market prices, but this is not the time for you to bail. By getting out now, you only seal in your losses. In fact, this may just be the ideal time to increase your holdings—while prices are down. Of course, the usual adviceabout diversification and asset allocation still applies, so keep a careful eye that your investments stay balanced between stocks, bonds, and cash according to your time frame for using the money and your tolerance for risk. In short, it's key to maintain a long-term perspective. Yes, you may suffer some short-term losses, but history has shown that the market will most likely recover over time.
5. Make contingency plans
Hopefully you won't have to implement it, but just in case, it can be reassuring to know that you have a plan B. If your finances get too tight for comfort, could you take in a roommate? Move in with your parents or other friends, at least for a while? Get a side gig? Chances are you won't have to act on any of these options, but it can be best to strategize ahead of time just in case.
There's no question that a recession can lead to financial hardship. But if we do head down that road, and you're prepared for what may happen, you'll be in the best possible shape to come out the other end not only unharmed, but with a deeper understanding of what it means to wisely manage your finances. This may be your first recession as an independent adult, but it most certainly won't be your last.
Have a personal finance question? Email us ataskcarrie@schwab.com.Carrie cannot respond to questions directly, but your topic may be considered for a future article.For Schwab account questions and general inquiries,contactSchwab.
As a financial expert with a deep understanding of market dynamics and economic trends, I can provide valuable insights into the concepts mentioned in the article by Carrie Schwab-Pomerantz on Market Volatility dated August 23, 2022. My expertise is rooted in a comprehensive understanding of economic cycles, market behavior, and prudent financial management.
Carrie's article addresses the concerns of a recent college graduate facing economic uncertainty, particularly in the context of a potential recession. Here are the key concepts discussed in the article, along with additional insights:
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Recession Definition and Frequency:
- Definition: A recession is defined as a period of declining economic performance across an entire economy that lasts for several months.
- Insight: Recessions are a normal part of the economic cycle, occurring approximately every five years since World War II, with an average length just under a year.
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Impact of Recession on Employment and Finances:
- Insight: Recessions can lead to rising unemployment, declines in stock values, and shrinking wages, causing financial hardship for individuals.
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Positive Steps to Ease the Impact of Recession:
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a. Make Yourself Invaluable at Work:
- Insight: Networking and researching new job opportunities can be crucial during a recession, especially if job security is a concern.
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b. Pay Off Expensive Debt:
- Insight: High-interest debt, such as credit card balances, should be paid off promptly to mitigate financial strain, especially as interest rates rise.
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c. Save as Much as You Can:
- Insight: Building and maintaining a healthy emergency fund is essential, with a recommendation to cover at least three to six months of nondiscretionary expenses.
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d. Stay Invested and Diversified:
- Insight: Despite market volatility, staying invested and diversifying across stocks, bonds, and cash is advised to maintain a long-term perspective and benefit from potential market recoveries.
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e. Make Contingency Plans:
- Insight: Having contingency plans, such as taking in a roommate or exploring side gigs, can provide reassurance and financial flexibility during challenging times.
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Long-Term Financial Management:
- Insight: Emphasizes the importance of a long-term perspective in financial management, acknowledging short-term losses but highlighting historical market recoveries.
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Personal Finance Preparedness:
- Insight: Being prepared for a recession involves proactive financial planning, which can lead to emerging from the downturn with a deeper understanding of prudent financial management.
In conclusion, the article provides practical advice for navigating financial challenges during a recession and underscores the significance of preparation, resilience, and a strategic approach to personal finance. If you have any specific questions or would like further insights into the concepts discussed, feel free to ask.
