If the United States is about to enter a recession, as some economists fear, it will be one of the most widely anticipated downturns in recent memory.
Americans have had lots of time to prepare. But are we ready?
First, some background: Three years ago, as the economy recovered from the brief COVID-19 recession, economists were already talking about another downturn. Russia had invaded Ukraine. Inflation was spiking. Interest rates were rising.
Months passed, no recession arrived, and hope dawned that perhaps the United States would achieve a “soft landing,” meaning no recession.
Now, recession fears have returned. President Trump’s campaign of import tariffs, among other factors, has shaken consumer confidence and spooked the stock market.
A March CNBC Fed Survey put the probability of recession at 36%, up from 23% in January. J.P. Morgan’s chief economist put the odds at 40%.
Recession or no, the U.S. economy has hit a “slow patch,” said Veronica Willis, global investment strategist at Wells Fargo Investment Institute.
Whether you are a cash-poor consumer or a top 1% earner, here are some steps you can take to protect your finances.
Paying off credit card debt is easier said than done, especially in a downturn.
If you have the resources, however, this would be an ideal time to get serious about reducing high-interest debt. The average credit card interest rate is a whopping 24.2%, according to LendingTree.
To make a dent in your debt, financial planners say, you’ll need to do more than make the minimum monthly payment: double it, add $100, or pay a percentage of your income.
If you’re strapped for cash, transfer the debt to another loan with a lower interest rate.
If you have good credit, consider a zero-APR credit card. You will pay no interest for 15, 18 or 21 months. Every dollar you pay reduces your debt.
Alternatively, transfer the balance to a home equity line of credit, or even a personal loan. You might pay 8%, 10% or 12% interest. That’s better than 24%.
With card rates ranging so high, dealing with that debt arguably outweighs any other financial goal — including savings.
For people with card debt, “usually it doesn’t make sense to build up the savings, because the interest rate that you’re getting on that savings is a lot lower than the interest you’ll be paying on the debt,” said Sean Higgins, an associate professor of finance at the Kellogg School of Management at Northwestern University.
If you are free of card debt, this is a good time to take stock of your savings.
Many finance experts say Americans should stockpile enough emergency savings to cover three to six months of expenses: roughly $33,000, on average, according to Investopedia.
Emergency savings exists for times like these, when workers are worried about their jobs. Yet, 27% of Americans have no emergency savings, Bankrate reports.
“Of course it’s easier to save when times are good than when you lose your job,” said Meir Statman, an author and finance professor at Santa Clara University.
Few American households can quickly amass $33,000 in savings, especially when times are tough.
Instead, consider more modest goals: Contribute a set amount of monthly income to emergency savings. Put the money in a high-yield savings account. Think hard before you raid the account for anything short of an actual emergency.
Now is not necessarily the time to cancel your European vacation.
“That would be, to my mind, an overreaction,” Statman said. “People need to live. People need to have fun.”
Even so, it might be a good idea to plan ahead for that vacation, or for any large, unexpected expense. Set aside money now so you don’t drain your savings when the expense arrives.
“You have to be thinking, ‘Am I going to need a new car in the next few years? Do I have the cash set aside for that car?’” said Timothy McGrath, a certified financial planner in Chicago.
It’s the classic investor’s dilemma: Stock prices have been sinking, but you don’t want to sell when they’re down.
If you’re a retirement saver, years away from retiring, then “the fact that the stock market is down 7 or 10% now isn’t so concerning,” Higgins said. Stocks will eventually rebound.
If anything, the current climate might be “a great time to buy stocks, because you’re getting them at a discount,” said Willis of Wells Fargo. When the market recovers, your portfolio will be worth more than ever.
It’s harder to avoid “selling low” if you are already retired and drawing down your savings.
You “do not want to be withdrawing from an aggressive portfolio during a recession,” said Seth Mullikin, a certified financial planner in Charlotte, North Carolina.
Ideally, retirees have less exposure to stocks. Experts say they should look for ways to cover their expenses without selling devalued stock shares.
When the stock market seesaws, investors are reminded of the value of “diversifying,” balancing riskier stocks with less volatile bonds and other fixed-income alternatives.
But it’s not so easy to diversify when the stock market is already in disarray.
“It’s too late to start thinking of pulling out of equities, because you’ve already seen that downturn,” Willis said.
Nonetheless, you may find opportunities to diversify in a shaky market.
“The good thing is that market volatility isn’t only in one direction,” Willis said. “You get days when the market is up.”
Take a look at your mix of stocks and bonds. The big market gains of 2023 and 2024 may have left you with a higher allocation of stocks than you want. If so, look for opportunities to sell stocks when prices are high, and reinvest those dollars in bonds.
Alternately, you could just sit back and wait until the market stabilizes. It’s easier to diversify when stocks are high.
“The point is, the recession,” if there is one, “will be temporary,” Higgins said.
This article originally appeared on USA TODAY: Are we headed into a recession? Here’s how to prepare.
