How to Prepare for a Recession

recession and economic uncertainty $100 bill tied in red cord

It was sobering news this summer when Bank of America economists put out projections of a “mild” recession to take place this year. That projection has since been pushed back slightly, but the fact remains that economists believe a recession is very likely in the near future. 

What does that mean to regular people, as opposed to economists? Well, record inflation rates coupled with high personal debt loads and a waffling jobs market has put many people on edge. So far, unemployment has remained low, and job openings have remained high, but some sectors (such as tech) have had increasing layoffs of late. 

Also: the Federal Reserve has aggressively raised interest rates in its last few meetings, and more increases are expected in order to try to put the brakes on continued inflation. Unfortunately, sometimes those moves by the Central Bank can push a teetering economy into a recession zone.

Prepare Now in Case a Recession Happens

When a recession is potentially looming, it is prudent to make sure your finances are fully prepared to deal with any economic conditions that may come along. Here are some steps to take to secure your financial situation, no matter what the economic weather may bring.

1) Save as Much as You Can

The primary concern in a recession is that the economy is contracting: companies hire fewer people, wages stagnate, and the possibility of losing your job can increase. That is why your number-one move right now is to set aside as much money as you can in savings or in an emergency fund. If you can, save at least a few months’ worth of income into your bank account. That way you can keep yourself afloat in the event of a job loss during the recession. 

2) Take Down Risky Investments

Right now is the time to reduce your exposure to risky or speculative investments. There may be a time and place for these investments in certain economic climates, but you want to be as far away from them as you can get when things start to get dicey. This is why it is highly recommended that you consider what you have your money in right now and perhaps cash out those positions that are overly speculative. 

3) Look for a Stable Career or a Side Hustle

If you already work in an industry that is stable, then great; count yourself among the lucky ones. But as the economy destabilizes, jobs that aren’t very secure — hospitality, retail, restaurants, entertainment, manufacturing are among the sectors that feel the punch first — are the first place where contractions take place. 

It’s not always possible to rethink an entire career, but now might be the perfect time to spread yourself a little thin and start your own side hustle. Pursue any small-business idea you have, or create an always-in-need service business, whether housecleaning, babysitting, driving and delivery or security. 

4) Reduce or Eliminate Debt Pre-Recession

It is a major problem to try to deal with debt when a recession hits. We may feel comfortable carrying a certain amount of credit card debt when we are safely employed and the economy is simmering. But debt quickly becomes a noose that tightens around your neck when interest rates are climbing, inflation is driving prices up and your job security wavers.

Now is the time to consider a debt consolidation loan or paying off all your debt in another way. You can always try the “snowball method” of paying the smallest debts first, or the “avalanche method” of paying the highest-interest debts first. But if you already feel squeezed, those methods might not work for you. Look into whether you qualify for a debt consolidation loan, which can usually offer you a lower interest rate than what you are paying now — and you can wipe out your debt in one fell swoop with the loan. 

5) Speak with a Financial Advisor

Sometimes the best thing to do is to speak with an expert. If you have a financial advisor that you trust, then you should consider speaking with that person about your current state of affairs. He or she can provide guidance about which steps are most prudent for you to take at a time like this. 

If you’re struggling with credit card debt, take action now, and speak with an advisor at Funding Hawk. Ask if they can help you get rid of your high-interest credit card debt, before we find ourselves in the middle of a recession.

4 Tips for Setting Your Financial Goals

Whether you’re looking to buy a home or get rid of debt, you’ll need to set your financial goals. This allows you to have clear objectives that you are working towards in the short-term and long-term. So here are four tips to help in setting your financial goals.

Clearly define your goals

The first step to setting your financial goals is specifying what you hope to accomplish. These goals must be specific, measurable, and have a set deadline. For example, paying off your student debt of $15,000 by the end of next year is a great financial goal to strive for. Setting vague goals, such as just having more money, will likely not give you an end goal to aim for, which makes it easy to lose sight of what you are working towards.

Make sure your goals are achievable

It is always good to challenge yourself, but setting financial goals that are too extreme means, you’re likely setting yourself up for failure. It is also common for those still starting out on their journey to financial freedom to become overwhelmed by setting too many financial goals at the same time. Therefore, it is advisable to take small but consistent steps towards your goals instead of trying to achieve them all at once. As you start achieving these smaller goals, you can progressively begin taking on more challenging ones.

Figure out your budget

Before rushing into achieving your financial goals, you must first figure out where you stand in terms of expenses and spending habits. This means establishing a budget to track your spending and see where every dollar is going. A budget makes it easy to identify opportunities for saving money and how much you can have left over at the end of each month. From there, you can get an idea of what financial goals are doable and how long it would take to achieve them.

Monitor your progress

Since your goals will often have a set deadline or timeframe, you should constantly be monitoring your progress and adjusting your goals as you go along. When you go through a significant life change of any kind — moving, a new job, starting a family or buying a home — that is a key time to re-evaluate your finances and revise your goals. And of course, there may be some unexpected bumps in the road that can hinder your progress. Those, too, require a new look at your money, how you are spending it and how you are saving it.

Above all, keep one single goal in mind — retiring young? buying land and building your own home? starting your own business — and make sure you spending and saving habits are always pointed in that direction. Long-term planning, more often than not, yields long-term results.

How to determine if you can afford to buy a home

buy a home

Buying a home is one of the biggest purchases and most important milestones in most people’s lives. But before rushing into it, you should determine whether you can afford to buy a home.

First, Make Sure You Have a Down Payment to Buy a Home

If you are looking to buy a home, the first step is making sure you have enough money to afford to make a down payment. In general, it is advised to have enough saved up to make a down payment of 20%. This allows you to avoid paying for private mortgage insurance (PMI), which adds to your mortgage payments every month.

Do the Percentages Math on Debt and Mortgage Payments

Another thing to consider when buying a home is how much of your income is being spent on your mortgage and debt. To determine if you can afford a mortgage, you can follow the 28/36 rule. This rule states that you should spend no more than 28% of your gross monthly income on a mortgage and no more than 36% on your total debt.

Your debt-to-income (DTI) ratio is typically used to determine whether you will be approved for a mortgage or not. You should aim to have a DTI of around 36%, as anything over 43% will likely keep you from being approved. To calculate your DTI, add up all your monthly debt payments and divide that by your gross monthly income. If your DTI is too high, you may want to reduce debt or wait until you start earning more before trying to buy a home.

Make Sure You Will Still Have Some Cash Left Over

The affordability of a home will also depend on how much your savings will be impacted if you choose to purchase it. Make sure that you have some cash left over after paying the down payment in case of the (likely) unexpected expenses that will pop up. Depleting your emergency funds to pay for a home is never a good idea and is a possible indicator that you can’t afford it right now.

The key basis for determining if you can afford a home is your mortgage rate. Your mortgage rate will depend on several factors, such as your credit score, down payment amount, and DTI ratio. Lenders take all these factors into account when determining your mortgage rate. Therefore, if you want to make sure your profile is in good shape to get the lowest possible mortgage rate. This often means paying down as much debt as you can before you try to buy.

Why Financial Literacy is Your Best Building Block to Wealth

Financial Literacy with Funding Hawk debt consolidation loans

“Financial literacy” may sound like some heavy-duty brainiac term — but honestly, all it means is how you make your financial decisions based on what you know about money. The “literacy” part isn’t about reading; it’s about understanding basic concepts that are core to how money works. And understanding how money works is critical in making all kinds of decisions that have both short- and long-term impacts on your financial stability — and your life. 

Why do I need financial literacy?

You want to work on your financial literacy so that you are able to make informed, sound decisions about money in your life. But like many things in life, financial literacy isn’t a one-and-done kind of learning; you will keep working on it your whole life. 

And aside from the obvious benefits of being able to make smart decisions about money – keeping yourself out of too much debt, being able to be financially stable — there are also positive health ramifications. Since money is Americans’ number-one stressor, it’s obvious that if you can master basic money skills that you would also be lowering your stress. 

Financial literacy can help eliminate that stress, by giving you skills and knowledge that make it much more likely you’ll have positive financial outcomes in your life. Financial literacy means you’ll be able to understand both basic financial concepts (related to banking and saving) as well as more complex concepts (like credit and interest) that control your money and money outcomes. If you understand those concepts, you can make financial decisions more quickly, more easily, and with better results.

So what do I need to be literate about? 

As we said above, learning financial literacy unfolds over a lifetime, and there are many concepts involved. But there are five basic categories:

  • Banking: Being fluent in how checking and savings accounts work, a basic understanding of interest, and knowing how to write checks and use debit cards.
  • Budgeting: Managing and reviewing monthly income and expenses, with an eye toward long-term goals. Building a budget framework so you don’t live above your means.
  • Saving: Setting aside a portion of your income for both long-term and short-term goals, building and maintaining an emergency fund, understanding how interest rates affect your savings.
  • Credit & Debt: Understanding how borrowing money works and what it costs, from credit cards to loans, learning about debt to income ratio and credit utilization (which impact credit score), being able to evaluation repayment terms, debt solutions and forbearance.
  • Investing: Understanding different investment vehicles, from savings accounts to stock funds, brokerage accounts, robo-investing and more. Contributing to retirement savings. Understanding tax implications and benefits of different investments.

Becoming financially literate about all of the above doesn’t just happen as you live life. Smart money consumers will actively seek out information, ask questions (of bank employees, financial advisors, friends and family), and not worry about looking uninformed. To avoid learning skills that will ease your progress in life because you don’t want to seek assistance is short-sighted; almost everyone needs help in mastering the above concepts.

What if I can’t “afford” financial literacy?

If you think financial literacy is not for you, because you’re struggling with debt or student loans or making ends meet, you’re wrong. Taking time now to learn these concepts will help accelerate your forward movement toward financial stability. Consider spending some time on personal finance websites geared toward education, such as NerdWallet and PennyHoarder.

But if you are suffering a financial hardship right now, or struggling to meet monthly minimums on escalating credit card debt, what you need now is a clear plan to get out of debt.