How can a recession affect personal finance?
The global economy is showing some alarming signs, and many people, including experts, are starting to worry about a full-blown recession. After all, countries all across the world have been reporting increased rates of inflation that have reached highs not seen in decades. The UK is experiencing inflation of over 13%, the US has reported inflation hovering around 8-9%, the highest it has been since the early 1980s, and the countries in the EU have annual inflation approaching 10%. At least for now, however, the second biggest sign of a recession - high unemployment, has not materialized, with unemployment remaining relatively low across the board.
Still, people's finances may be negatively impacted as a result of increased interest rates, a common measure enacted to combat rising inflation, and even more so in the event of an actual recession. It is important to know what to expect and to plan accordingly, especially if you already have a sizeable amount of outstanding debt. Consulting with a financial expert, such as the professionals at Hudson Weir, could be the best way to get a clear picture of your current debt and its structure. Thanks to the professional help, you can identify the highest-priority debt payments that must be covered no matter what while also finding ways to start building up a financial cushion.
Managing Debt In a Recession
Depending on the specific financial state and debt structure, there could be several different approaches when it comes to ensuring your financial stability in the event of an economic downturn. For example, people who have already managed to build up at least some emergency savings should probably focus on paying down any existing high-interest debt while the economy is still stable.
Especially when it comes to loans or lines of credit that have variable interest rates, as their associated payments will continue to rise with any additional interest rate hikes. A typical example is credit card debt, which apart from having variable rates, also usually comes with higher interest rates compared to other debt types.
On the other hand, those without sufficient or stable income may need to put more emphasis on saving money. Look at your current debt and figure out the absolute minimum amount of payments that you have to cover each month in order to avoid accruing any unnecessary fees. Then, make sure to regularly put aside a fraction of any leftover funds to act as an emergency reserve.
Lifestyle Changes May be Necessary
The impact a recession could have on people's finances could leave a mark on their lifestyle as well. Usually, this manifests in reduced spending and avoiding making any big purchases such as real estate properties or automobiles. Getting loans with adjustable rates, such as an ARM (adjustable-rate mortgage), may be a wise move in a growing economy, as the lower interest rates will immediately translate into lower monthly payments. However, this becomes the opposite during an economic recession.
In general, taking on any additional debt is to be avoided. Even if you definitely need the fresh funds, consider the risks carefully - recessions often lead to higher job uncertainty. Organizations reporting lower profits are likely to start looking for ways to reduce their expenses, and, unfortunately, job cuts are one of the commonly implemented measures.
An economic slowdown may seem scary, but with careful planning, things do not need to get out of control. Try to get your personal finances, and most importantly, your debt, in order. If necessary, seek help from financial experts, as they could help consolidate your debt into a single loan with a lower interest rate or direct you to a debt settlement company that will try and negotiate with your creditors on your behalf.