With rumors of a recession swirling, many people are wondering what they can do to keep their finances on track if the economy slumps. Stephanie AuWerter, Editor of SmartMoney.com, discusses the possibility of a recession and what to do to successfully ride out the storm.
First, be sure you understand what a recession is. An economy goes into recession if it experiences two quarters or more of negative GDP growth. "Right now, some folks are saying that we're already in a recession. Others are saying that we're about to be in a recession," says AuWerter. "Still others are saying that we're going to see a slow-down in the economy, but that we're going to scrape by without actually hitting a recession." In reality, it's hard to make an accurate guess until the numbers are in, and they're not in yet.
In general, announcing a recession won't make much of a difference for the average consumer. "You're going to be feeling a strain regardless of whether we're technically in a recession or not," says AuWerter. Your best bet is to prepare for an economic slump ahead of time.
One important step is to make sure you've built up an emergency fund of 3-6 months of living expenses. One of the most real threats to average consumers is job loss, and those funds will come in handy if you are laid off. AuWerter suggests putting this money in a cash account, such as a money market account. This way, you won't be withdrawing money from your 401k account or using credit cards to pay for essentials, like groceries.
Investors are worried about a recession too. "If you are along term investor, you need to remember that this too shall pass," says AuWerter. "Focus on the fact that you're buying more shares at a lower price when stocks are down." She suggests diversifying your investments so that you have a mix of stocks, bonds and cash. Don't look for big returns during a recession; look at the big picture instead.
If you are looking to invest, consider stocks that cater to people's everyday needs. "Think health care, think utilities," says AuWerter. Also, consider investing in companies that cater to people's vices, like beer and cigarettes. "The fact of the matter is, when times are rough, people need their vices," says AuWerter. Stay away from stocks that involve discretionary items, like restaurants and car manufacturers. When money is tight, people won't be going out to eat as much or may put off buying a new car until they really need one.
For more information on recessions, as well as more personal financial advice, click here to visit SmartMoney.com.
By Erin Petrun