You might’ve noticed upon following the latest financial news that the U.S economic expansion is almost in its untimely end.
The reason why predicting recessions is difficult.
Even for people who are trained to identify recession, it casts a spotlight on how complicated predicting downturns are and its return scares financial markets and everyday Americans alike.
“Economists don’t necessarily have a strong track record for predicting downturns before they start” that’s what economists at the International Monetary Fund (IMF) - Zidong An, Joao Tovar Jalles and Prakash Loungani - found on their working research from March 2018.
In April and October every year, the IMF surveys forecasters in the private sector. Only five were predicted in the April survey a year before the past 153 recessions in 63 countries between 1992 and 2014. The IMF found that it is a much more common phenomenon not to successfully identify a recession than falsely identifying one.
An economics professor at George Washington University and a senior fellow at Indeed’s Hiring Lab, Tara Sinclair said that some people say economists exist to make weather forecast look good, at least they can look at the planet, and they can dial satellites and information -- they can see clouds coming over.
She added that the complexity of the macroeconomy is such that we haven’t yet figured out a clear, causal model of how things work.
It is never too late to ensure that your finances are well-equipped when a storm will come if the U.S economy is keeping you up at night.
As recommended by experts, below are tips on what you can do to make your finances recession-proof.
To create some breathing room in your budget, it is best to pay down any outstanding debt that you have specifically high-cost debts.
Job loss is where economic downturns often lead to. Paying off your obligations might bring you more peace of mind if you are worried about job security. Before you turn your attention to your other loans such as mortgages or auto loans, prioritize credit card debt. According to CFA, Bankrate’s chief financial analyst, Greg McBride, student loans have more favorable provisions which make paying them off less of an urgency.
Paying off your debts is still considered good financial practice even if you are not worried about losing your job in a downturn. According to a Bankrate survey in March 2019, because of the amount of debt they owe, 13 percent of Americans aren’t saving more.
Paying the day-to-day expenses will be difficult for Americans if there will be job loss.
It will be possible for you to still afford your necessities while you will search for a new position if you will beef up your emergency fund-- this is a cash for events like downturns that you reserve. Anastasio said that saving should be a priority even if you are paying down debt. Loading up your emergency fund with one month’s worth of living expenses should be your first focus. Pay off your debt after that.
It is a good idea to go through your monthly expenses before a downturn begins. Identify which items are a necessity, and which items are discretionary -- services or items you don’t really need. McBride said that the discretionary items are most likely ones that you can either eliminate now or in the future.
She added that certainly, your starting point would be the discretionary items such as subscription services or even just spending patterns. Dinners out or night outs at the bar with can friends can seriously add up over time.
Spending no more than 30 percent of your net income on discretionary items is what experts typically recommend. To ensure that you are living within your means and not overspending, it is a good idea to create a monthly budget.
Your next worry when thinking about a downturn might be about your investment after addressing your emergency savings and paying off your debt. You might feel fearful that you’ve lost all your earning after years of hard work with the thought of the markets plummeting.
McBride said that changing your strategy would be the worst thing you could do.
According to McBride, it is going to be tough because a stock market during a recession will easily fall 30 to 40 percent peak to trough. However, if you make regular contributions and reinvest all of the distributions, you may be able to make those market gyrations work for your own best interest.
It is always a good time to make sure your financial portfolio is ready, regardless of whether the storm is on the horizon, Anastasio says.
Flynn Financial Group Inc