How to test your income amid growing recession fears

  • Recent banking woes have made an economic downturn more possible, experts say.
  • If you’re worried about how a recession might affect you, advisers say, now is a good time to test your finances.

With recession forecasts already forecast for 2023, the recent failures of Silicon Valley Bank and Signature Bank have further stoked fears that an economic downturn is on the horizon.

But it remains to be seen when, if at all, a recession – defined as two consecutive quarters of negative gross domestic product growth – will occur.

Still, many Americans — 41% — have taken steps to prepare for a possible economic downturn, according to a Morning Consult survey. This survey, of 2,203 adults, was carried out in February, well before the recent banking problems set in.

Now all eyes are on the US Federal Reserve, which will decide whether to continue raising interest rates at its meeting next week, or take a break from its inflation-fighting strategy as it monitors the banking sector.

What the Fed could do is a “toss-up,” predicted Raymond James chief economist Eugenio Aleman, noting that the central bank has access to far more information about banks than the big audience.

Raymond James still expects a 25 basis point rate hike next week.

An increase would affect everything from the amount of interest borrowers pay on debts such as credit cards, mortgages and auto loans to how much consumers can earn on their money.

Those preparing for a recession largely take two actions, according to Morning Consult – 44% say they are saving more money or creating an emergency fund, and 39% say they are cutting back or spending more. more strategic way.

A small proportion, 11%, reported storing goods or food. The remaining 6% indicated “other”.

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“Really hiding and preparing for tough times seemed to be a popular theme,” said Amanda Jacobson Snyder, data journalist at Morning Consult.

As banking issues made headlines, clients began to report more pressing concerns, according to Kamila Elliott, a certified financial planner and co-founder and CEO of Collective Wealth Partners, a boutique advisory firm in Atlanta. Elliott is a member of CNBC’s Financial Advisor Council.

Much of it, according to Elliott, is due to PTSD from the 2008 global financial crisis. But today’s numbers – including recent stock market performance – are stronger than they were then, he said. she stated.

Still, there are a few steps advisors recommend taking now to make sure you’re prepared for a downturn.

Much of how a recession can affect you comes down to one thing — whether or not you still have a job, noted Barry Glassman, certified financial planner and founder and president of Glassman Wealth Services. Glassman is also a member of CNBC’s Financial Advisor Council.

An economic downturn can also create a situation where even those who are still employed earn less, he noted.

As such, it’s a good idea to assess how well you could handle a drop in income.

Make sure you have some sort of safety net.

Barry Glassman

President of Glassman Wealth Services

“Test your income against your current obligations,” Glassman said. “Make sure you have some sort of safety net.”

While the US economy is still buoyant, recent banking problems could have an impact on employment, according to Raymond James’ Aleman.

“The biggest risk today, because of these events, is that companies will get spooked and start to slow down hiring,” he said.

As the banking woes grabbed the headlines, a client recently asked Elliott if it would make sense to move more of his funds into gold.

His answer: No.

But hoarding emergency cash should be a priority, she said. That way, if you’re laid off, you have enough money to support yourself for a while without having to make a fire sale, Elliott said.

Admittedly, finding additional money may be more difficult in an environment of persistently high inflation. These higher costs have prompted some Elliott customers to cut back on extras such as food delivery to find more wiggle room in their budgets.

“Some of the luxuries we had during Covid are kind of disappearing because people’s budgets are tight,” Elliott said.

“People are realizing they can’t go on like before,” she said.

The benefit for conservative investors is that they can now earn higher interest rates on their money.

“They’re finally getting a safe return on their money,” Glassman said.

Higher interest rates mean consumer debt increases.

Elliott said he recently saw a credit card charge an annual percentage rate of 30%.

Experts say it might be wise for consumers feeling the pinch of high balances and rising rates to find a way to renegotiate what they’re paying on that debt.

jessica peterson | Tetra Images | Getty Images

Even better, paying off those debts in full will help create financial flexibility in your budget.

Student debt holders should also keep in mind that they will likely soon be forced to resume payments on federal loans.

Because the benefits of paying those balances directly are limited, Elliott said, she tells clients to instead put the money they would pay for those debts into a savings account, which can earn 4% interest.

“Once the payments resume, transfer that money and pay off or repay that student loan,” Elliott said.

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