he world is in a mess right now, and so is the global economy. The economy recently bounced back after the covid, but the experts believe the world is heading towards another economic slowdown.
The US economy made a considerable recovery after the covid pandemic with a growth of 5.7%, the strongest since 1984. It had dropped 3.4% in 2020, the massive drop in 74 years. The government spending for the Covid 19 pandemic played a considerable role in substantial economic growth. Increased consumer spending, investment, and inventories also contributed to the sharp increase.
Though the economy showed positive growth in 2021, the US economy dropped 1.4% in the first quarter of 2022. The expert believed that the slowdown was inevitable following the economy's rapid recovery last year.
2022 Possible Economic Slowdown.
The US saw the fastest inflation in 40 years. The US economy proliferated, causing the prices to rise quickly. The demand is high, but the supply chain is constrained due to the Russian-Ukraine war and China's zero covid policies.
It is a tale of two economies. The domestic US economy boomed after consumer, real estate, and business investment accelerated. However, the trade deficit also increased rapidly in the USA as exports were low, but imports were at their peak. It seemed as if business investment and consumers kept the US economy afloat when the foreign side of the economy collapsed. The economist believed that the supply constraints would ease after the pandemic. But, with the ongoing Russian-Ukraine war and China's forced lockdown, things don't seem to get better.
The only option to cool down the inflation is slam on the brakes and cause a recession. In an attempt to fight against inflation, the US Federal Reserve has increased the interest rate and has signaled to raise rates six more times if necessary. Increasing the interest rates means decreasing the overall spending. The mortgage interest rate and credit card loans would be high, making it expensive to borrow and spend the money. The US Fed is contracting the US economy to cool down inflation despite the threat of slower global growth.
While most economists believe that the US is highly likely to face a recession, others believe it is just a soft landing to combat the surging inflation. But, no matter what, the economy is undoubtedly heading for an economic slowdown, and people need to prepare for it.
How To Save and Plan Better For Future Financial Safety?
With the economic slowdown right on the corner, people need to prepare for the harsh economic times. These times are difficult for the consumers, and it often spells financial trouble by increasing unemployment and distressing the income. Thus, you need to save and plan better on savings for future financial safety in these uncertain times.
Here are some tips to help you to prepare for the future financial safety:
Make A Financial Plan
It's always essential to make a financial plan so that you would have a sound financial journey in these uncertain times. But before that, you should review your finances to know your financial position and where you stand.
- Start by determining your earnings and minimum expenses. You need to understand your financial needs and analyze how much debt you have, the basic monthly expenses, or if significant life events require substantial costs.
- After you are aware of your financial situation and obligations, you need to plan how you aim to pay off all your debts and how you plan to meet your financial needs. You need to prepare a budget and stick to it.
- List all your potential financial income and expenditure and record all of your expenses to control yourself from overspending.
It's crucial to make a financial plan and have a financial goal to ensure future financial safety. Also, you may reform your budget to prepare for the recession by cutting off the discretionary expenses. It would help if you focused on spending on necessities only, not what you want.
Build Emergency Fund
During times of uncertainty, it is crucial to build an emergency fund. Emergency funds keep you afloat if you lose your job or financial uncertainties arise. You should cut down your unnecessary expenses and save as much as possible to make the fund. The experts recommend saving 50% of your income in the hard times. You can keep them in high interest-yielding savings accounts such that you can withdraw them easily when required.
Financial experts recommend saving at least six to nine months' income in an emergency fund. It is uncertain about your job in economic hard times, so it is better to prepare beforehand. Savings of six to nine months would be enough for you to last till you have found another job. It helps you to survive without the need to borrow high-interest loans.
A famous saying is, Don't put all eggs in a basket. Likewise, you should not invest all your money in one financial instrument or industry. If that industry collapses or plunges, you may lose all your money.
A diversified portfolio helps you to diversify your risk. There is a high chance of losing your investments during financially challenging times. Thus, when you diversify your portfolio, you mix a variety of assets to your portfolio. This helps reduce the volatility of your portfolio and balances your risk and reward. If one investment loses money, the other can make up for the losses.
Pay Off Your High-Interest Debt
You need to track down high-interest rate debts and pay them off. If you have credit card debt, you should put in extra money to pay your debt first. This will help you eliminate the monthly expenses and save more for your emergency fund.
If you cannot fully pay off your high-interest debt, you can consider debt consolidation. You can take out low-interest loans such as personal loans to pay off your high-interest credit card debt. The more debt you owe, the more you have to pay interest. It can be hard to pay off your debt and interest during a financial crisis.
Thus, make sure you at least pay off your high-interest debt such that you don't have to pay more in interest. If nothing else, make sure you pay minimum monthly payments such that you won't incur more debt.
Cut Your Expenses
During a recession, switch yourself to saving mode. This means that you should cut up discretionary expenses apart from essential costs. The financial experts recommend spending no more than 30% of your net income on discretionary expenses. You should create a monthly budget and stick to it to avoid overspending your money.
When the economy is shrinking, it's not the time for luxury and extravagance. Spend only on items that are necessary for survival. For instance, essential expenses include electricity and water bills, groceries, and rent. Expenses such as vacations, movie nights, and dining out are discretionary expenses. You should cut off such expenses and save that money instead.
Look For Side Hustles and Freelancing Jobs
It's better to look for side hustles and freelancing jobs on top of your primary profession. This will generate extra income, and you can save more. In times of uncertainty, it's better to have a backup job such that even if you lose one job, you can rely on other jobs to provide income.
Invest For Long Term
Most of the time, when the recession hits, the stock market drops significantly. This leads to panic selling, and most people end up at a loss. In such cases, you should invest for the long term such that even if the stock market falls sharply, you won't lose anything until you sell it.
The economy is cyclical, and the stock market will rise in the future. It would be best to buy when the stock market is low to sell it high later. Also, that being said, you should only invest in the stock market if you have extra money lying around.
Refinance Your Housing Mortgage
Falling mortgage rates accompany the economic slowdown or recession. Thus, you can take advantage of reducing your total mortgage debt by refinancing your mortgage at a lower interest rate. If you can lock the low-interest rate during the recession, you will reduce your financial baggage, which you can later pay off when things get normal.
The economic slowdown or recessions are inevitable. However, you need to proactively prepare yourselves to protect yourself financially during the hard times. Most people panic when they hear recession is right on the corner. But, these economic cycles are just like seasons that come and go.
Thus, just like preparing warm clothes to face the winter, you need to prepare a financial plan and strategies to face a recession. You can easily survive these challenging economic times with the right financial plan and steps.