A recession is a period of economic downturn that is generally characterized by a considerable decline in economic activity, including decreased income levels, growing unemployment, lower business investments and reduced consumer spending. Kavan Choksi points out that financial stability becomes pretty challenging during recession, making effective financial management highly important.
Kavan Choksi talks about how to effectively manage finances in a recession
Subsequent to a period of robust economic expansion, the United States is likely to see weaker growth in the year ahead. Even if the country did miss a recession narrowly, it is always better to be prepared for such an unfavorable economic climate. There are many steps one may take to protect their finances in a recession, including:
- Revisit the budget: Keeping a close tab on the budget is a cornerstone of good financial health in many ways, particularly when inflation is high. Getting priorities right is vital when anticipating a recession. One must start by reviewing their budget and differentiating varying expenses like transportation, food and housing from discretionary spending. After doing so, one should try to identify whether there are opportunities to curtail or delay the discretionary spending or not. In many cases, delaying or downsizing big expenditures may improve near-term savings to a good extent.
- Pad emergency savings: Maintaining a healthy emergency fund should be prioritized, as it can help people to stay afloat amidst unforeseen personal circumstances, like a job loss or a family medical emergency. One must try to have three months’ worth of household expenses held in a savings account. This amount should be larger if a person is the sole earner of their household.
- Tackle debt: As the Federal Reserve has been tightening monetary policy to rein in high inflation, the interest rates have been trending upward. These high interest rates would be bad news for borrowers, especially if they have revolving debts like credit cards. Creating a debt consolidation strategy would be a good move for people who have multiple debt balances. It would allow you to take out just one fixed-rate loan and use its proceeds to pay off various other, higher-interest balances. Debt consolidation can actually provide people with the dual benefit of streamlining payments and potentially lowering interest expenses.
- Consider staying invested: Selling away stocks usually feels tempting when the market is turbulent. After all, it is not easy for a person to just stand idle while their investment portfolio loses value, especially if they do not know when it might rebound. But making any decision in panic often ends up being a mistake. When selling in a falling market, one is likely to incur major losses. Investors who sell off their assets in a hurry and wait out the volatility may even find it very challenging to predict the right time to re-enter the market accurately. Hence, it is usually smarter to stay invested.
In the opinion of Kavan Choksi, one should keep the points discussed above in mind to get through the recession without dealing with major losses. It is prudent to maintain a steady focus on the financial goal at hand and avoid getting sidetracked by market noise to achieve long term goals.