The word recession is still on economists’ lips as we head into 2023. The latest GDP report did show that the U.S. economy rebounded by 2.6% in Q3 after declining for Q1 and Q2 of this year
Despite this, experts are saying there is a 70% chance the U.S. will go into recession in 2023, according to a December Bloomberg survey.
Personal finance expert Suze Orman joined the chorus during a September episode of her Women & Money podcast, predicting a recession at “the beginning of 2023.”
She recently sat down with Moneywise to talk about the risks of not being prepared for a financial emergency.
On the positive side, Orman has suggestions for proactive ways to prepare for a recession in the new year.
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Assume you are unemployed
The job market looks fine right now. According to the latest report from the Bureau of Labor Statistics, the U.S. economy added 263,000 jobs in November.
Moreover, the unemployment rate is holding steady at 3.7%.
But Orman warns against complacency.
“If there is a recession, you better believe the same firms that are hiring now, will be looking to reduce their payroll,” she writes. “I think the best gift you can give yourself right now is to imagine you are laid off.”
In December 1969, the unemployment rate in the U.S. was an equally low 3.5%, yet an 11-month recession followed right afterward.
When you are laid off, paychecks stop coming in. So Orman highly recommends building an emergency savings fund before your next crisis hits.
But a lot of people don’t think about saving until after something happens — like losing yur job.
“For 40 years, I’ve tried to change the mindset of people,” Orman said in a recent interview with Moneywise.
“Usually, people have to hit rock bottom, before they make a change.”
So how many months of financial cushion do you need?
Orman suggests having enough savings to help you cover your expenses for a year. If that seems like a far-fetched target, just focus on saving as much as possible — one month at a time.
Eliminate your credit card debt
Credit cards are a great invention — for companies that offer you credit cards.
For those that have an unpaid balance on their credit cards, debt could balloon dramatically during a recession.
The reason? High interest rates.
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The average credit card interest rate in America today is 22.91%, according to Lendingtree. At that rate, the compounding factor can make any unpaid credit card balance grow to dangerous levels very quickly.
Orman notes that carrying credit card debt right now is “asking for so much trouble” as interest rates are on the rise.
She’s not the only expert who believes you should get rid of credit card debt altogether.
Legendary investor Warren Buffett has also warned about the danger of carrying an unpaid credit card balance.
“If I owed any money at 18%, the first thing I’d do with any money I had would be to pay it off,” Buffett said in 2020. “You can’t go through life borrowing money at those rates and be better off.”
Don’t spend it all
In an economy where the unemployment rate is low and wages expected to increase by 4.6% next year, it would be easy to assume that people are piling money into their savings.
But that’s not the case.
According to a recent report from LendingClub, 6 in 10 Americans are living paycheck to paycheck.
Inflation is one reason why people are having trouble saving – nearly everything has gotten more expensive.
In a recent interview with Moneywise, Orman stressed the importance of having an emergency fund set aside.
“It is not improbable that come April of next year that the Fed funds rate could be very close to 5%, which means interest rates on credit cards could be way up there,” says Orman.
By spending less than you earn, you can build up your emergency savings faster. And by getting used to a more frugal lifestyle, you can lower your living costs — so the same financial cushion can last longer in the event that you lose your job.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
Source: https://finance.yahoo.com/news/40-years-ive-tried-change-130000513.html