Are we headed for a recession? Answers to your main questions

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This story is part So Money (subscribe here)an online community dedicated to financial empowerment and advice, led by CNET Editor at Large and So Money podcast host Farnoosh Torabi.

What is happening

A growing chorus of economists and financial experts predicts that the United States is heading into a recession – defined as two consecutive quarters with a significant and widespread decline in economic activity.

why is it important

Past recessions have been marked by widespread layoffs, bankruptcies, higher borrowing costs and stock market turbulence.

And after

No one can predict the future, but it is essential to remain calm. Gather facts and act deliberately to protect your financial situation.

After years of low unemployment rates and strong market growth, economic storm clouds are looming. like a record inflation blocks consumer spending, with big box stores like Walmart and Target feel the impacteconomists and financial experts fear that we are headed for a recession.

These experts have their eyes on gross domestic product, or GDP – the value of all goods and services produced in a country during a given period – which is a key metric used to gauge economic growth and recessions. In the first three months of 2022, US GDP fell 1.4%, likely due to a spike in COVID-19 cases and rise in inflation. The war in ukraine and stock market instability has only compounded broader economic woes. When GDP falls for two consecutive quarters, the country is technically in a recession. (The National Bureau of Economic Research usually makes the official call, but that’s not yet.)

With growing anxiety about an impending recession in the United States, you may be worried, or at least a little curious, about what this may mean for your finances. The My So Money podcast audience recently sent in a number of recession-related questions – about how best to prepare, to register, invest and generally make smart money moves in these uncertain times. Here are some tips to help you through a tough financial time for many of us.

First, what usually happens in a recession?

It’s always helpful to go back and review the results of the recession so you can manage expectations. Although each recession varies in duration, severity and consequences, we tend to see more layoffs during economic downturns. Access to the credit market could also become more difficult and banks could be slower to lend because they worry about default rates.

If the Federal Reserve continues to raise rates to fight inflation, we could see an increase in borrowing costs. So even if you get a loan or a credit card, the interest rate may be higher than it was the previous year. We are already seeing this in mortgage markets where the average rate for a 30-year fixed mortgage is above 5%, the highest level since 2009.

The bright side of some recessions is that as rates rise and inflation slows, the prices of goods and services fall and our personal savings rates increase. We could also see an increase in entrepreneurship, as we saw in 2009 with the Great Recession, as the newly unemployed are inspired to turn a small business idea into reality.

Should I stop investing in my 401(k)?

With stocks spiraling downward for weeks, many want to know how a recession could affect their long-term investments. Should we stop invest? The short answer is no. At least not if you can help it. Avoid panicking and cashing out just because you can’t stand the volatility or watch the down arrows.

My advice is to avoid knee-jerk reactions. Now might be a good time to review your investments to make sure you’re well diversified. If you suddenly notice a change in your risk appetite for any reason, discuss it with a financial expert to determine if your portfolio needs adjustment. some online robo-advisor the platforms offer services to customers and can provide advice.

Historically, it pays to stay true to the market. Investors who cashed in their 401(k)s during the Great Recession missed a rebound. The S&P 500 is up almost 150% since its lows in 2009, adjusted for inflation.

The only caveat is that if you desperately need the money you have in the stock market to pay for an emergency expense like a medical bill, and there’s no other way to allow it. In that case, you might want to check out 401(k) loan options. If you decide to borrow from your retirement account, commit to paying it back as soon as possible.

What happens if I or my partner are made redundant?

During the Great Recession, unemployment reached 10% and it took an average of eight to nine months for the unemployed to find a new job. So it might be time to review your emergency fund if you think there is a shortfall. If you are unable to cover a minimum of six to nine months of expenses, try to accelerate your savings by reducing your expenses or generate extra money.

If you’re self-employed and worried about a potential downturn in your industry or a loss of customers, explore new sources of income. Also aim to increase your cash reserves. If previous recessions have taught us anything, it’s that having money unlocks choices and leads to more control in tough times.

What happens if the interest rate on my debt increases or loans become harder to access?

Like the Federal Reserve keep raising interest rates to curb inflation, adjustable interest rates may increase – thereby increasing credit card APRs and loans, and make the monthly payments more expensive. Contact your lenders and card issuers to learn more about low interest credit options. See if you can refinance or consolidate your debt with a single fixed rate loan.

In past recessions, some banks were reluctant to lend as often as they did in “normal” times. This can be confusing if your business relies on credit to grow or if you need a mortgage to to buy a house. It’s time to pay close attention to your credit score, which is a determining factor in a bank’s decision. The higher your score, the better your chances of qualifying and getting the best rates.

My final note is that it is important to remember that recessions are an integral part of the business cycle. Long-term financial plans will always experience periods of decline. Since World War II, the United States has experienced a dozen recessions and they usually end after a year or sooner. In contrast (and some better news), periods of expansion and growth are more frequent and longer lasting.

Read more: 8 Ways to Protect Your Finances Against the Recession

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