How to Manage Your Money During a Recession

You’ve probably heard that a recession is coming more times than you can count over the past year. By now, you may be wondering, is it true? The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The factors the NBER assesses include consumer spending and employment, among others. In the first half of 2022, U.S. Gross Domestic Product (GDP) decreased for two consecutive quarters, although it increased at an annual rate of 2.6% in the third. Inflation is continuing to soar at 8.2%, reaching its highest increase in 40 years. Unfortunately, these signs are causing more and more economists to predict a recession. This may sound scary, but if you’re reading this, you’ve already lived through at least a few recessions. Probably the first thing that comes to mind is the Great Recession, which occurred from 2007 to 2009, and was one of the worst financial crises since the Great Depression. You also just lived through the shortest recession in U.S. history, which occurred between February and April 2020, when the global economy ground to a halt as the coronavirus spread around the world. While recessions are challenging times, they’re also part of the normal business cycle. If you know how to prepare yourself, you can (at the least) remain financially stable, and (at the most) use them to gain unique opportunities to build wealth. So, what can you do to prepare? To answer this question, I spoke to a series of finance experts with experience in this area, including: Marc Russell, a former financial advisor and founder of the financial literacy platform Better Wallet; Chloe Daniels, founder of CloBare Money Coach; and Attiyah Blair, a multi-millionaire real estate investor who started her journey during the Great Recession. If you want to come out of a recession more financially stable than before, here’s what to do. 1) Reassess your expenses and increase your savings. As a first step, take a close at your spending habits and create a plan to increase how much you save. Building up your emergency fund will prepare you to tackle future expenses that aren’t already a part of your monthly budget, including unplanned costs due to a shortage of cash, a layoff, or other unexpected events like an increase in food or gas prices. An emergency fund of six months will help you face potential financial hardships. In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term. Pro tip: Finding a second source of income — outside of your day job — will keep you extra prepared. Whether you decide to pick up a part-time job, start a side hustle, or sell used items (books, clothes, jewelry) through second-hand vendors, creating additional revenue will give you something to fall back on in case of a reduction in or loss of your primary income. 2) Invest in things that increase in value over time. As you increase your cash reserves, investing more in assets (things that increase in value), like stocks or real estate, will pay off in the long term. The key is to invest with a 10-year outlook. During recessions, you have access to more assets for less money. It’s common to see the stock market declining, which provides an opportunity to invest or purchase shares of good companies at a discounted price. Between January and mid-October 2022, the S&P 500 index, a securities index made up of 500 of the largest publicly traded U.S. companies, had declined by over 20%. While a short-term investor might see the 20% price drop as a loss, it presents an opportunity for the long-term investor to build wealth. “Historically, since 1957, when the S&P 500 was created, the market has been returning close to 10% yearly on average. The market is going to go up and we will see downturns over time, But, in times like today, the market is on sale. It’s a great opportunity to consider investing more in good companies with a long-term strategy because you’re buying the stocks at a lower cost basis,” Marc Russell told me. The real estate market has also slowed down since the beginning of the year, though home prices have significantly increased overall in the past two years. If we enter a recession, people will have less access to cash and credit. As a result, we will start seeing more real estate deals; short sales or even foreclosures will happen more. Attiyah Blair began investing in real estate during the 2007 recession and shared that she has since then become a multi-millionaire through long-term real estate investing. She shared the importance of buying real estate properties with a long-term view. “I was 23 in 2007 when I bought my first rental property. I lived in it and rented it out after moving out. I kept the property throughout the recession because once you sell it, you don’t get the wealth-building part of real estate. So, during a recession, buying rental real estate properties will provide additional cash flow for you and an opportunity to build wealth through property appreciation over the long term,” Blair said. Pro tip: One of the most important things to remember is that investing is a long-term financial play. So, try not to be deterred by the short-term movements of the market. Dollar-cost averaging, or investing progressively in the stock market instead of all at once, is extremely valuable during challenging economic times. “When we’re in a recession, it becomes even more important to continue with dollar-cost averaging, which allows you to keep putting money in the market and autopilot things so that you’re not constantly worried about what the market is doing. If you can stick to a plan and automate you investments, you’re less likely to be constantly checking your accounts and seeing the up and down movements of the markets,” Chloe Daniels said. 3) Diversify your investments. Seeing that the price of one stock is down, and then deciding to put all your money into that stock is too risky. When it comes to the stock market, for beginners, an index fund — a mutual or exchange-traded fund that tracks a market index such as the S&P 500 or Total Stock Market Index — is likely the best place to start. “Index funds provide what most investors want in their portfolio: diversification and passive management. Because if your portfolio is actively managed, that’s increasing the fees eating at your returns,” Russell said. Can you diversify your investments by picking individual stocks? Sure, but it’s a more complicated exercise that would require a more significant investment. The experts I spoke to recommend purchasing an S&P 500 index fund for a few hundred dollars from low-cost brokerage firms like Fidelity, Vanguard, M-1 Finance, and others. “If you’re buying low-cost, well-diversified index funds, you’re betting on the entire market rather than trying to pick an individual winner,” Daniels said. Pro tip: In the long run, the stock market and real estate assets increase in value over time. The sooner you start investing, the better you will position yourself to build long-term wealth. 4) Leverage tax advantages. There is a multitude of tax advantages available to you when you invest in assets. For ages, people have been using the stock market and real estate to build wealth for this reason. For instance, some retirement accounts offer tax benefits, like a 401k, 403B, 457. With these accounts, your contributions are deducted from your income to calculate how much you should pay in taxes. In other accounts, like a Roth IRA and Roth 401k, your investments grow tax-free until retirement. There are also tax deductions for owning real estate property, and the possibility to defer tax payments on real estate profits via a 1031 Exchange while continuing to build wealth through real estate. It’s essential to leverage these benefits on your wealth-building journey. “Taxes are our biggest expenses. So, if we can legally save money on taxes, why wouldn’t we? Many people don’t want to invest in retirement accounts because they think it locks their money up until retirement. But there are so many ways of getting around that legally that you do not need to worry about that right now,” Daniels said. “Instead, worry about getting as much money as invested as you can. You’re in your younger years of earning, probably making the least amount of money you will ever make. If you can, front the tax bill now by investing in Roth accounts and get tax-free growth for the rest of your life.” Pro tip: Using tax-advantaged accounts and tax deductions will help you reduce your overall tax liability and accumulate more wealth. You can prepare for the next recession by looking closely at your money, increasing your income and cash reserves, and investing progressively and consistently. Do this, and you may come out the other side in a much better financial position. Editor’s note: This material has been prepared for informational purposes. If you are seeking more specific financial advice, it is best to consult tax, legal, and accounting advisors who can provide guidance on your unique situation.

How to Manage Your Money During a Recession

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