Stock prices are bouncing like ping-pong balls. Credit is drying up faster than water in a desert. A worried Federal Reserve lowered the fed funds rate on overnight loans between banks, as well as the discount rate charged on direct loans to banks. Economists are predicting a slowing economy.
What can you do while the experts debate whether we’re headed for a recession? Here are three strategies that can help you keep your sanity no matter what happens.
- Ignore the fear factor. The media likes to hype bad news. But because economic reports lag behind actual activity, recessions are often recognized only in retrospect, meaning attention-grabbing bad news may be old news.
In addition, according to the National Bureau of Economic Research (NBER), recessions since World War II have been short-lived, averaging less than twelve months. So by the time a tightening economic cycle makes the headlines, the downslide may be more than halfway over.
Stay tuned to reality. Instead of panicking over news reports, make and adjust your financial and investing plans using logic and common sense.
- Do your own research. The formal definition of a recession is a period of two or more quarters of reduced economic activity. The NBER looks at aggregate economic activity for the US, and the information they use to identify recessions is readily available if you’re interested in seeking it out.
But there’s an easier method. You can see what’s happening in the broader economy by simply looking around your everyday life. Are your investment yields decreasing? Are your friends and neighbors being laid off and having trouble finding new jobs? Are you spending less on purchases you “want” as opposed to those you “need”? The answers provide clues that can help you decide what you need to do to protect yourself.
- Set up an emergency fund. No matter what the economy does, having enough readily accessible cash in a savings or money market account to support yourself through a financial emergency is sound policy.
How much you need depends on your personal situation. One way to decide: Judge how many months it will take you to find a new job. Then add up your monthly living expenses. Multiply the two for a reasonable estimate of the amount to set aside.