Prepare now for the coming recession

For a while now people have speculated about the next recession, and in my opinion, it is no longer a question of “if ” but “when” we enter into the next one.

The economic boom of the past decade was immediately followed by the COVID-19 pandemic and a government response that caused havoc on the American economy and economies throughout the world. Trillions of dollars in relief funding were flooded into the market to stimulate the economy, and now that the world has largely reopened, everything is catching up and we are seeing some of the unintended consequences of those actions. Inflation has hit its highest levels in decades, and with the Federal Reserve forced to raise interest rates to deal with out-of-control inflation, the next recession has pretty much become inevitable.

But while this gets talked about by pundits and economists alike in broad terms focused on global markets and ramifications, there is a direct impact that individuals and families are likely to feel, one much more localized and personal. So, the questions become, “How will this affect me directly, and what can I do about it?”

Recessions tend to last about 10 months on average, though some (like the Great Recession of 2008-’09) can last longer and cause far more damage to the economy. For people who are forced to endure through it, recessions can seem endless.

For starters, retirees are likely to feel an impact, forced to spend more on what they ordinarily spend on the most basic of needs, like food and medicine. And they have to endure these higher prices while often living on a fixed income. So, for those retirees who fall into this category, some belt-tightening may be necessary until the economy starts churning as it should again.

In general, it will be a wise practice for most people to pretend they have to live on 20 percent less than they are earning right now, at least during the length of the coming recession. This will allow them to create a buffer for themselves in case the cost of living rises by up to 20 percent, something which is not outside the realm of possibility. The time to start this belt tightening is today, not after the recession “officially” sets in — it will be much less of a shock to the system to begin these scaled down habits now. It’s a sacrifice, to be sure, but it’s a temporary one.

Next, with interest rates where they currently are, this is not an ideal time to be making major purchases, such as houses or cars. The better option is to wait for interest rates to stabilize a bit, which they will, and allow those major purchases to create less pain. Similarly, if people were planning to make major purchases with cash — big items like appliances or home furnishings, for example — it’s also a good time to wait, as those prices are likely to soon start dropping. As strange as it may be to hear, a recession can lead to opportunities for those who primarily transact with cash.

The same goes for credit card usage — it is always a good idea to somewhat curtail using credit cards for large purchases unless people plan to pay off the bill all at once each month. Otherwise, the large interest rates are simply not worth it. People can follow the lead of businesses here — large companies have slowed down their borrowing right now, and people can and should do the same.

The most unfortunate byproduct of a recession is job loss, and we are already seeing major employers forced to lay people off. The numbers can be jarring — 11,000 people at Facebook, thousands at Telecom and numerous others at Microsoft, Bed Bath & Beyond, Amazon and more. This looming uncertainty is one more reason to reconsider borrowing large amounts of money, and also to plan ahead.

How? Build up emergency savings accounts and make that a key focus right now before things go from bad to worse — a good rule of thumb is having three to six months of income available in savings, but even one month is a good place to start. It’s also a good idea to pay down debt now while you still have the chance; an advisable formula is an even split between accumulating savings and getting rid of debt.

Recessions don’t last forever and once this next one begins, people should have no doubt that we will in fact emerge from that, as well. If individuals and families approach it with their eyes open and address these firm realities, they will once again be able to weather the storm. But the key is to start planning and taking steps to address it now, before it actually begins.

Commuters and travelers await the arrival and departures of Metro North commuter trains in Stamford in 2020.